S&P 500: 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.
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