A String of Up Fridays

Trading on Fridays is different from trading on other days of the week.  For a trader to be a buyer on Friday, that trader has to be pretty confident that the market, and his particular stock, can survive a whole weekend's worth of event risk without the ability to trade out of that position.  So when we see a string of mostly up Fridays, that is a sign of trader confidence, and thus of a price top.  Similarly, a string of mostly down Fridays is a sign of pessimism.

Years ago I sat down and tried to formulate an indicator which could capture this phenomenon.  After some experimentation, I found that a 6-week lookback period seemed to work well.  That is what is featured in this week's chart.  The indicator simply measures the percentage of up Fridays for the DJIA over the preceding 6 Fridays.

Interestingly, I also built the same indicator for the SP500, which most of the time moves with the DJIA, but there are some slight differences.  I found that the DJIA's version seemed to "work" better.

Going into this week, the DJIA has seen 5 of the last 6 Fridays close higher.  That is a pretty fat string of Fridays, and it shows us a high reading for this indicator.  It is possible to get a higher reading than this, but this is a pretty good indication of a top-worthy condition for stock prices.  It is worth noting, though, that in a strong uptrend the market can ignore this and other overbought conditions and keep chugging higher.  That's possible.

My friend Rob Hanna of Quantifiable Edges has an interesting related observation, noting recently that monthly options expiration Fridays tend to have a bearish bias most of the time.  He included this chart in his recent newsletter:

It looks at the performance of SPY, the big ETF tied to the SP500, and just on monthly expiration Fridays.  As a filter, he looks at whether or not SPY is above its 200-day moving average (200MA) on the Thursday of options expiration (OpEx) week, although he notes that the tendency is the same during downtrends.  Since 2000, OpEx Fridays have had a substantial bearish tendency.  It does not work every time, but over the long run it is an impressive tendency.

Interestingly, the last OpEx Friday on April 19, 2024 saw the SP500 close down, in keeping with this tendency, but the DJIA closed up.  Even though the SP500 is arguably a much more well-constructed index, a lot of people especially in the media thing that the DJIA is "the market", and so the reporting of what the DJIA does each day pervades into public consciousness in a big way.

Any sentiment indication, including a count of Fridays' price direction over time, is just a "condition", not a "signal".  It is a set up for what could happen, but it is not an indication marking the moment for a trade entry.  The condition going into this week shows traders are feeling pretty optimistic, as they should be given that prices have been going higher since the April 19 price bottom in the SP500.  The market usually works to punish such overconfidence, eventually.