'Sell Rosh Hashanah, Buy Yom Kippur' Strategy Makes Dramatic Return In 2023

One market adage that is commonly mentioned just ahead of the Jewish holidays is "Sell Rosh Hashanah, Buy Yom Kippur."

With the holidays commencing Friday at sundown, it is time for this year's interpretation of the adage from the perspective of this investor.

By adhering to this seasonal pattern in 2022, an investor would have been handsomely rewarded in what was one of the most stellar performances over my decades of following this not-so-widely-followed market indicator. 

Origin: The rule 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, they're free to return to the markets and evaluate investments for the upcoming year. Those who are ultra-religious may abstain from the markets altogether during this period.

Mixed Results Over Long-Term: No trading adage or strategy is 100% accurate. In 2021, following the original adage was a winning strategy, and it has repeated that performance again in a much more dramatic fashion this year.

This year could provide for some extra volatility as the commencement of the Jewish New Year (Rosh Hashanah), sundown on Friday, just happens to coincide with September’s quadruple witch expiration — a date on which stock index futures, stock index options, stock options and single stock futures expire simultaneously. That only occurs four times a year.

On Friday, the SPDR S&P 500 ETF Trust SPY opened at $447.15.

Looking back at the last day of trading before the holidays in 2022 — Thursday, Sept. 22 — the S&P 500 cash index ended the session at 3,757.99, marking investors' exit.  Upon returning to the markets on Thursday, Oct. 6, the opening print was fractionally higher at 3,771.79. This marks a reentry to the index at nearly the same price.  

Therefore, the first part of the adage did not yield much of a discount to investors, but it did turn out to be a fantastic entry point to participate in this year’s rally. 

Yet buying on the opening of Oct. 6, 2022, upon the conclusion of the holidays, with the index at its current level (based on Thursday’s, not Friday’s close), has yielded an astonishing gain of 718 handles or 19%.

Of course, this was just ahead of a major market bottom one month later on Oct. 13, 2022 at 3,491.58. Once again, this reinforces the merits of the “buy and hold” longer-term strategy.

Sell Rosh Hashanah In 2023? The index is in a much different state this year than last year. It has retreated from its July high, but stubbornly.

For investors looking to buy the dip, the correction has been shallow, and sharp declines are often quickly reversed the same day or shortly thereafter.

One factor in favor of selling on Friday (the last trading before the holiday), is that it coincides with a quadruple witch expiration. Over the years, these expirations have often marked key turning points in the markets as either a reversal or a strong continuation of the current trend.

So far in 2023, the March expiration confirmed a strong rebound off the rocky February and early March price action. At this time, the June expiration initially provided for another move higher in July, but faded in August. A rebound in September has the index modestly in the green.

Buy Yom Kippur? Buying the index blindly at the conclusion of the holidays in 2022 turned out to be a bold and rewarding move. Making the same move this year should be predicated on a few factors. 

First, and most importantly, what does the index do over the next 10 days? If it sharply reverses course, then there are identifiable levels of support that could provide for a lower-risk entry to the long side.

Based on the early price action on Friday, today’s expiration could be unwound to the downside. 

If the index continues to creep higher over this time period, then perhaps the long entry can still be made, but on a “shorter leash.” In other words, by limiting your risk, if the long entry does not work in your favor, losses can be mitigated and allow for other long attempts to be made. 

With the index up nearly 18% for the year, a lot of things are going to have to be right for the rally to continue. The first one is the third-quarter earnings season, which kicks off in earnest in mid-October. In addition, the battle against inflation — while not slipping into a recession — must go favorably

Finally, the delicate global macro and political situation must remain status quo.  

Moving Forward: The resiliency of the S&P 500 index to have such an outstanding performance this year, in the face of rapidly rising interest rates and the economy not falling off a cliff, goes against most textbook theories.

Being a successful short-term or long-term investor requires adaptation to different environments. When long-term trends or theories are disrupted, investors must adapt to the new circumstances. If investors know one thing, it is to expect the unexpected. Adjust, adapt or sit on the sidelines with cash — which has not yielded more in decades — until the battle against inflation is complete. 

Related Link: Nasdaq Futures Edge Down Ahead Of Data Deluge, UAW Strike; Analysts Warn Fed May Not Be Done With Rate Hikes

Image: Shutterstock.