A New Twist On 'Sell Rosh Hashanah, Buy Yom Kippur'

There are several old adages related to the markets. The more common ones such as "Sell in May and Go Away," "Santa Claus Rally" and the "January Effect" all refer to seasonal strategies to time the market.

However, one that isn't as well known or followed is  the "Sell Rosh Hashanah, Buy Yom Kippur" trading rule.

Origins

The rule's origin is based on the concept that followers of the Jewish faith want to be free from material possessions during the most sacred period of the calendar year. During the 10 days between the two major holidays, Jews reflect on their actions from the previous year and atone for their sins, while setting a new agenda for the upcoming year.

Upon completion of the cleansing process, Jews are free to return to the markets and to evaluate investments for the upcoming year. Some ultra-religious types may abstain from the markets altogether during this period.

Related Link: What Is This Year's October Surprise?

Mixed Results

Over the last few years, the strategy has yielded mixed results. If one had implemented this strategy in 2008, they would be convincingly in the black. Of course, the 17.76 percent beat down that year may not be replicated for quite some time.

Before blindly implementing this strategy, investors should consider other factors, such as the month of October being known for the the Crash of 1929 and 1987.

In 2015, this strategy yielded profits. The first evening of Rosh Hashanah was on September 13, and the observance of Yom Kippur ended on September 24. Over that time period, the S&P 500 index declined 1.4 percent, from 1961.05 to 1932.24. If one had waited to exit the index at is current price as Friday at 10:45 a.m. EST (2162), they would have been rewarded with a 12 percent gain.

Different Scenario

Each year there are different factors that can alter the results of this trading adage.

In 2015, the quadruple witch expiration took place during the stretch between the two holidays (September 18). That turned out to be four days before the first session after Yom Kippur observance concluded on September 24. With that being one month after the August Flash Crash, the expiration had a bias to sell-side, as investors were still unsure whether the event was the dawning of a bear market or just another correction in the long-term bull market.

Late Start To The Holidays

This year's fly in the ointment is the unusually late start to the beginning of the Jewish holiday. The reason for this being is that this past year was a leap year, not just in the secular calendar, but in the Jewish calendar as well.

The Jewish leap year is a little more extensive. In order to align the traditional lunar year with the solar year of Judaism, which works on a system of 19 year cycles that consist of seven leap years, a full calendar month (a second Adar) is added to the year.

Therefore, with the extra month, the conclusion of the holiday is just before the Q3 earnings season gets into full swing.

With the holidays falling just ahead, it wouldn't be out of the ordinary for portfolio managers to lighten up ahead of the fundamental news that may affect the direction of the market over the next few months. As a result, it wouldn't be out of the ordinary for the index to tail off over the designated time period as larger players trim some of holdings.

If earnings expectation are met or exceeded, then managers may choose to redeploy their assets to their current holdings or add new ones to their portfolio, which coincides nicely with the "buy" Yom Kippur part of the adage.

One other factor to keep in the mind is that Friday marks the end of Q3 and managers just may use today's rally to make their portfolio look pretty after such a volatile quarter.

Another Scenario From An Active Investor

Tactical bull, Sean Udall of the Tech Stock Strategist, has his own twist on the adage. Based on the uncertainty of the upcoming earnings season, his approach is to selectively sell some holdings.

He states, "The general view is cautious on the market and bullish on beaten cheap stocks." Therefore, he may be trimming longs on some high fliers at or near his target prices, but not abandoning the issues he sees as currently undervalued.

In his opinion, the latest round of FANG upgrades is going to end badly, but as always timing is critical.

The Bottom Line

As with any stock market adage, it should be taken with grain of salt. Any investor can attest to the fact that there is not one foolproof strategy, no matter what it's based on, that can be solely relied on to time the market.

Instead, investors should constantly review their goals and the objectives of their investments and base their decisions on that long-term plan.