First day of the month tendency
I did a study recently, looking at the behavior of the SP500
on the first trading day of a new calendar month. It has long been said that
pension fund flows and automatic mutual fund investments for 401Ks, etc. tend to
put a positive bias on the last few days of the month and the first few days of
the new month.
What I found is a strong positive bias in recent years for the first day of the
month to be an up day. The last day of the month and the second day of the month
do not show that same effect.
The first chart shows an “equity curve” of the first day of the month versus the
rest of the month. It assumes you “buy” the SP500 at the close on the last day
of the month, and then sell it at the close on the first day of the month,
thereby capturing the price change on just that first day. The Rest Of The Month
line does the opposite. Since this is just a study, and not a real trading
system analysis, no allowance is made for commissions, slippage, or money market
interest. It makes a pretty strong argument for the first day having a decent
positive tendency.
Interestingly, this phenomenon is a fairly recent development. The second chart
shows a longer view of the same idea, this time on log scale, and the First Day
equity curve is pretty flat through the 70s and 80s. It really only starts to
slope upward around 1997, implying that the first day effect was not really
prevalent before then.
When I included the last day of the month into the mix, and also the second day
of the month, they did not make the results better and in fact they hurt the
performance of the First Day equity curve. A
comparison of the 3 methods’ results is shown in the third chart.
Does that mean Monday will be an up day? Not necessarily, of course, but given
the recent odds I would not want to bet against it.
Tom McClellan
Tom McClellan is the Editor of
The McClellan Market
Report, an 8-page report covering the stock, bond, and gold markets, which
is published twice a month and the Daily Edition of the newsletter. Subscribers
range from individual investors to professional fund managers. Tom is a graduate
of the U.S. Military Academy at West Point where he studied aerospace
engineering, and he served as an Army helicopter pilot for 11 years.
In June 2006, Timer Digest ranked The McClellan Market Report #1 Timer for the
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