It’s the First of the Month
- Posted by JC Parets
- on May 31st, 2011
Since September 1997, the Dow Jones Industrial Average has gained more points on the first trading day of each month than all of the other days of the month combined. (Yes you read that correctly)
While the Dow gained 4947.37 points between September 2, 1997 (7622.42) and May 31, 2011 (12569.79), it is incredible that 5906.80* points were gained on just the first trading days of the last 165 months. The remaining trading days combined lost 959.43 points during that period. This averages out to gains of 35.79 points on the first trading days of each month while losing an average of 5.81 points the rest of the month. Most recently, since the bear market bottom in March 2009, the Dow has been up 20 of the 26 first trading days of the month.
We can sit here for hours trying to figure out why this is the case. But Why doesn’t pay us. What pays us. For How Long pays us. So let’s focus on that. It’s important to know when a peculiar phenomenon like this is taking place. Think about it, the Market is up on the 1st trading day of the month over 75% of the time. Whether we make decisions based on this information or not, wouldn’t we rather be in the know about something like this than out of the loop? Here are are some the irrelevant theories:
1. The trend is your friend. Being invested on the first trading day of the month has been working consistently and very profitable. The Dow was up more than 1,100 points in 2010 in the 12 first-day-of-the-month trade. And hedge funds recognize that and take advantage of the one-day trade.
It’s partly “momentum,” says Paul Hickey of Bespoke Investment Group. “There are some people playing those short-term momentum trends and hopping on.”
2. New cash enters market. Those automatic deposits to 401(k) plans and other investment accounts are put to work by fund managers on the first day of the month, creating heightened demand for stocks.
3. Fresh-start mentality. Money managers and investors view the turning of the calendar as a fresh start, and a good time to put fresh money to work.
Here is a chart of the data through February of this year from the Stock Traders Almanac. I added the new data points from the last 3 months below the graph:
We will see on June 1st if this trend continues. I’m always fascinated by stuff like this, so it will be a topic of conversation as long as it keeps working. Like any other trend, it’s your friend until it’s not.
* Data from last 3 months via Yahoo Finance Historical Prices (6021.31 -168.32 +56.99 -3.18)
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J.C. Parets is the Founder & President of Eagle Bay Capital, LLC. He earned the Chartered Market Technician designation (CMT) in 2008 and now actively manages money incorporating Technical Analysis and Behavioral Finance into his practice More
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