These numbers can tell you if the market will rally
One of the joys of market research–or any research for that matter–is the
opportunity to discover new and interesting relationships. Many of these
are random dead ends, but some open the door to new perspectives and
understandings.
Right now, I’m not sure whether I have a dead end or a new perspective, so
I’ll let you decide. On my free
research website, I recently looked at one-day declines and found that,
since 2003, over 70% of all points gained in the S&P 500 Index occurred on a
Monday or Tuesday. Interestingly, if you had only traded Wednesdays and
Fridays over the past three years, you would barely be up money. Well over
90% of the recent bull market occurred on Monday, Tuesdays, and Thursdays.
As of Friday, we have been down over 1.5% in the past two days. To
widen my investigation, I decided to look at the S&P 500 from 1995 through
the present (N = 2792 trading days) and focus on two-day periods in which the
market has dropped by one percent or more (N = 575). When the two-day
decline fell on a Monday (N = 103) or Tuesday (N = 112), the change over the
next two days averaged .38% (Monday: 60 up, 43 down; Tuesday: 58 up, 54
down). When the two-day decline fell on a Wednesday (N = 115) or Thursday
(N = 126), the next two days averaged .03% and -.04%, respectively (Wednesday:
62 up, 53 down; Thursday: 64 up, 62 down). Fridays (N = 119) fell between
these extremes, as the next two days averaged .22% (61 up, 58 down). What
this suggests is that buying a two-day decline of one percent or greater was
profitable on Mondays, Tuesdays, and Fridays, but not on Wednesdays or
Thursdays.
Frankly, this made little sense to me. It is not clear why some days of
the week should reverse weakness, but others shouldn’t. To test the
finding, I conducted the same analysis, but now focusing only on the most recent
data from 2003 to the present (N = 774 trading days). In that time, we’ve
had 105 two-day periods that have been down by one percent or more. Table
1 shows how the next two days shape up:
| Average Change | Up | Down | |
| Monday | .76% | 14 | 6 |
| Tuesday | .27% | 9 | 10 |
| Wednesday | .13% | 12 | 9 |
| Thursday | .15% | 9 | 14 |
| Friday | .23% | 12 | 10 |
Table 1: Two-day price changes following two-day
declines of 1% or more, as a function of day of week: 2003 – present
Now let’s look at the completely independent data sample from
1995 – 2002 (N = 2018 trading days). Table 2 summarizes our findings:
| Average Change | Up | Down | |
| Monday | .28% | 46 | 37 |
| Tuesday | .40% | 49 | 44 |
| Wednesday | .01% | 50 | 44 |
| Thursday | -.08% | 55 | 48 |
| Friday | .21% | 49 | 48 |
Table 2: Two-day price changes following two-day
declines of 1% or more, as a function of day of week: 1995 – 2002
What is clear from the division of the sample is that there is a
similar pattern in the data over time. Two-day declines that fall on
Monday, Tuesday, or Friday result in larger average changes than those falling
on Wednesday or Thursday. Indeed, there seems to be no upside edge at all
to buying weak markets on Wednesday or Thursday. This pattern has been
surprisingly consistent for over a decade.
Random dead end or meaningful relationship? Only further
explorations, which I will report here and on my
site, will provide the answer. But if Monday is down, I may just
consider buying…
Brett N. Steenbarger, Ph.D. is Associate Clinical
Professor of Psychiatry and Behavioral Sciences at SUNY Upstate Medical
University in Syracuse, NY and author of The
Psychology of Trading (Wiley, 2003). As Director of Trader Development
for Kingstree Trading, LLC in Chicago, he has mentored numerous professional
traders and coordinated a training program for traders. An active trader of the
stock indexes, Brett utilizes statistically-based pattern recognition for
intraday trading. Brett does not offer commercial services to traders, but
maintains an archive of articles and a trading blog at www.brettsteenbarger.com
and a blog of market analytics at www.traderfeed.blogspot.com.
He is currently writing a book on the topics of trader development and the
enhancement of trader performance.