Are there certain specific days that are better than others, when it comes to investing? It just might be that there’s historical evidence of a pattern of better stock market returns on certain days than others.
As regular readers might notice, I occasionally like to dive into the data to find trends about stock market returns. While I generally focus on more of a passive, index fund strategy, I do think that it’s also interesting to find patterns that might give us an edge if we choose to be a bit more active. This way, we may have something to tip the odds in our favor a bit.
A prior analysis I did on monthly stock market returns showed how there are some historical patterns that seem to indicate better stock performance in some months than others. A subsequent analysis on the September effect delved further into that particular month, indicating that September is historically poor performing relative to others. The premise held up the very next month after the post, as the market plummeted by over 7% in that 30 day period.
This got me thinking – if we could go beyond identifying monthly stock returns, and instead looked at daily stock returns, could we find any discernible patterns? In other words, are there certain days that provide better returns than others?
As I did before, I pulled raw historical stock market data from the S&P 500 index. This time, I just looked back to 2000, but I changed the data points to daily. I had to set up the spreadsheet with a variety of formulas, so it took a bit of time to convert the raw data into a place where I could generate some insights.
But when I got done, I found something interesting: Stocks tend to go up, higher than they otherwise would, on the first trading day of the month.
Essentially, looking back since 2000, it’s clear that there have been more first days of the month that went up versus those than went down. So, from January 2000 to November 2011, the breakout was as follows:
- “Up” first trading days of the month: 90
- “Down” first trading days of the month: 52.
Interesting. It became clear that first trading days of the month tend to have stock price increases, more so than stock price declines. But what about the actual returns themselves?
I broke out the different types of classifications of trading days and totaled them as follows:
- First trading days of the month: 143
- Other trading days of the month: 2,837
Then, I did a simple calculation of taking the average daily return (up or down), summed them, and divided by the total number of days in each respective category. Granted, this isn’t a weighted average, but a direct simple sum and divide approach. Here are the results:
- First trading days of the month: 0.192% average daily return
- Other trading days of the month: -0.005% average daily return
Now, this was even more interesting. The first trading days of the month yielded an impressive average of a 0.19% daily return. If that seems small, remember that it’s for an average day. Just a day. By projecting out over a larger number of days, we can see that getting returns like that is pretty good! All the while, when removing these first days from the mix, and looking at all other days – we can see that the market fell short of breaking even.
Implications: It seems like while there’s certainly variability in the data, the first day of the trading month tends to outperform the average of the other days. Thus, perhaps there should be consideration given to this data when deciding when to buy or sell market baskets of stocks. Maybe buying toward the end of the month makes more sense, and selling soon after the first few days of the month makes sense.
I’m not completely sure why this phenomenon takes place, but it could be because there are more institutional investors putting money in the market at the beginning of the month, 401(k) plans putting in money at predetermined times, or maybe inherent optimism at the beginning of a new time period – much like people get fired up with resolutions at the beginning of a new year. Who knows?
It turns out that some others have discovered this concept of the first day of the month effect too, as I subsequently found out after doing this analysis. Well, that’s ok :) Of course, I still think that there’s a potential opportunity here that’s really been flying a bit under the radar. This isn’t discussed too often in personal finance circles.
My Questions for You:
What do you think of this effect? Is it something you’ve considered when making buying/selling decisions?
Why do you think that this clear pattern exists? There must be a logical explanation, right?