Everyone seems to be looking for that edge in the stock market, and wouldn't it be great if simply choosing the right day could boost your returns? Well, it's a bit more complicated than that, but I'll share what I've learned.
First, some people love to say that Monday is a good day to trade because stocks often drop following the "weekend effect." Historically, the first trading day of the week tends to be the most volatile. For instance, between 2010 and 2020, the S&P 500 had an average return of 0.14% on Mondays. That might not sound like much, but over a year, these small percentages can add up. Talking about volatility, it's a crucial term in the industry as it represents the degree of variation in trading prices.
Now, Tuesday is often considered the best day to buy stocks. Between 1980 and 2010, studies show that stocks posted positive returns about 52% of the time on Tuesdays, higher than for most other days. Traders speculate this happens because any negative news over the weekend has already been priced in by Monday, making Tuesday calmer. James O'Shaughnessy, an asset management expert, highlights in his research that market psychology and behavioral finance play significant roles here.
On the other hand, many argue Wednesday is "hump day" in every sense of the word, showing neither strong gains nor losses. If you're looking for consistency, Wednesday might be your best bet. Trading volumes also tend to stabilize mid-week, providing a more balanced market landscape. The Dow Jones also shows smoother trends mid-week during periods of economic uncertainty, making it less risky for those who shy away from volatility. This is one of those industry terms that mean huge price swings which can be gut-wrenching.
By Thursday, traders have often digested most of the week's news, making it another volatile day. You will frequently notice traders adjusting their portfolios ahead of the end of the week's trading. A performance analysis from Fidelity Investments noted that Thursday's trading volumes and values spike, especially in sectors like technology and healthcare.
Ah, Friday! The end of the trading week often sees a split opinion. Some traders liquidate positions going into the weekend, fearing any unforeseeable weekend news. That can cause prices to dip, presenting buying opportunities. Did you know that a Buying Stocks Friday analysis from 2010 to 2020 showed a slight, but consistent, average drop in prices by about 0.08% on Fridays? It's a small margin, yet experienced traders often capitalize on even the tiniest percentage changes. It's why market sentiment (another industry term) matters so much.
Does the time of the day you trade matter at all? Absolutely! The first hour of the trading day, known as the opening bell, shows significant fluctuations due to the inflow of market orders accumulated overnight. For instance, between 9:30 AM and 10:30 AM EST, the NASDAQ often registers some of its highest trading volumes. Conversely, the last hour before the market closes, from 3:00 PM to 4:00 PM, is also fraught with action as traders finalize their positions. High-frequency trading algorithms often kick in during these periods, adding layers of complexity to the price movements.
Another interesting aspect is how macroeconomic events influence trading days. For example, the release of U.S. Non-Farm Payrolls usually happens on the first Friday of each month. This generally causes a market stir, making the preceding Thursday and subsequent Friday highly volatile. In 2008, during the financial crisis, each employment data release affected the market by an average of 1.5%. If you've been trading or even just watching the market during Federal Reserve announcements, you'll know that these can swing the market's mood drastically, especially mid-week.
Seasonal factors also can't be ignored. "Sell in May and go away" is more than a phrase; historical data validate it. Between 1928 and 2013, the S&P 500 provided an average of 0.30% monthly returns from May to October, compared to 0.94% from November to April. Traders often reduce exposure during this six-month period due to lower trading volumes and summer vacations, which can lead to fewer buyers and sellers to counteract large price movements.
So what about holidays? Shortened weeks can cause quirky trading patterns. Adam Hewison, co-founder of MarketClub, often says that markets tend to rise before long weekends and holidays. The Christmas rally or the "Santa Claus rally" also comes to mind, referring to the market's tendency to climb in the last trading week of December, often due to increased investor optimism and holiday bonuses making their way into the market.
The bottom line is, while there's no magic formula, understanding these patterns and trends can make you better at navigating the stock market. I've often found myself glued to Bloomberg and CNBC, absorbing any tidbit that could give me a trading edge. You'd be amazed how many successful traders stick to a disciplined approach based on these insights.