Interesting Trading Pattern...

The latest market conditions have brought an interesting trading pattern to my attention. After running a few back-tests, I found that this pattern has held up not only over the past couple of months, but also over the whole of 2008. Alright, so you're probably wondering what the pattern is. Well it's quite simple, and I know I'm not the first one to have researched it, however I haven't heard any mention of it over the past year or so. The pattern involves the simple behavioral tendency of retail and professional investors alike to exit, or sell, positions on a Friday (or the last day of the week, if there's a holiday) and to enter, or buy, positions on a Monday (or the first day of the week). This phenomenon recently occurred to me when I was sitting at my desk wondering whether I should enter a position before or after the weekend. Given all of the global volatility, I figured that it would make more sense to wait until Monday (just in case China decided to vacate the U.S. treasury market over the weekend : ). The underlying catalyst is simple, but the results warrant some attention. Year to date, each Monday the S&P 500 has returned an average of 1.18% compared to a -2.08% loss each Friday. This is a spread of 3.26%! Even more significant is the fact that Monday has the only positive average return out of the five trading days per week. Below I list the average year to date returns for each day of the week. Keep in mind, they may not be exactly the same day of the week due to holidays, but I just needed to get the effect of the beginning and end of each week.

Average Returns YTD:
Monday = +1.18%
Tuesday = -.30%
Wednesday = -.36%
Thursday = -.73%
Friday = -2.08%

So I continued to run this test back to the beginning of 2008 and I got similar, but not quite as astounding, results.

Average Returns (since start of 2008):
Monday = +.75%
Tuesday = -.74%
Wednesday = -.18%
Thursday = -.43%
Friday = -.54%

Another interesting finding was that 55% of the Mondays dating back to 2008 posted positive gains, which is impressive given an index that has shed half of its value over that same period of time. This figure compares to the 61% of Fridays that posted negative returns.

Remember, past performance should not be used to predict future returns, however, given the volatile times, one should not dismiss the fact that investors are looking to reduce exposure going into the weekend and re-initiate positions at the beginning of the following week. I'm sure some hedge fund could generate considerable returns by somehow leveraging this pattern, but I will simply use this data as one of my checks for entering and exiting a position. As long as nothing blows-up over the weekend, entering swing trades at the end of the day Friday might nudge the odds in your favor. As always, questions and comments are welcome!