There are market statistics for just about anything imaginable, including the best trading day of the month. Just take a look at the following chart of the cumulative return of the S&P 500 versus the return of the first day of the month. Although the S&P is down for the decade, the market has returned over 22% on the first day of the month:
There are no secrets in the market so this is not a new phenomenon and I cannot take credit for its “discovery” and neither can any one person in particular. However, let’s look at this statistic in a little more detail (including a slightly different opinion) and find out why this phenomenon exists. Then let’s look at what I believe is the best way to trade using this information.
IS THE BEST TRADING DAY REALLY THE FIRST OF THE MONTH?
The best explanation I have found for the “why” behind the first of the month numbers is from Jay Kaeppel in his recently published book entitled Seasonal Stock Market Trends: The Definitive Guide to Calendar-Based Stock Market Trading (John Wiley & Sons, 2009). I am going to summarize his findings but if you want more details on this and other seasonal factors I strongly suggest you add this book to your library. If for nothing else, it will be a valuable resource for years to come (until the numbers have to be updated again).
Mr. Kaeppel has researched the best trading day of the month using the DOW instead of the S&P and using numbers since January 1, 1901, not just the past decade. His conclusion: the second day is the best trading day of the month. The reason behind the phenomenon is the new cash coming from employees who automatically invest a portion of their paychecks in various investment vehicles such as stock mutual funds. These paychecks are distributed most often at the end of the month (and in the middle but that is a post for another day). Therefore, according to Kaeppel:
“Because the majority of mutual funds have a charter that compels them to put any new cash invested to work in the stock market as quickly as possible, in most cases, the fund manager will put that new cash to work in the stock market as soon as possible. To do so, he or she must go into the marketplace to buy stocks. This influx of cash creates buying demand for stocks. If the manager waits until the majority of incoming investment capital is accumulated, then the most likely time he or she would put that money to work is the second trading day of the month” (69).
The second best trading day of the month according to Kaeppel? The first.
HOW TO USE THESE STATISTICS: BUY THE EXPECTATION. SELL THE RESULT.
I am sure you have heard the old Wall Street adage “Buy the Rumor. Sell the News.” I prefer to call it “Buy the Expectation. Sell the Result.” The adage is usually associated with individual stocks or economic reports but I suggest you can also use it with seasonal and monthly trends as well.
So, let’s keep this simple with a simple plan. Obviously the best two trading days of the month would be the first and the second as money comes into the market from active fund managers. However, it would stand to reason that the last two trading days of the month would present the trader with a great opportunity to enter the market in anticipation of (=expectation) the best two trading days. Then as the market cools off the savvy trader can take the money off the table and wait for the next opportunity.
Do not get me wrong: I do not trade just because it is the end of the month. If my CROSSHAIRS develops during this time, then I know the probability of my trade working is greatly enhanced. I am much more confident in its potential based on the rules included in my Intelligence Report. If my CROSSHAIRS does not set up then I do not trade. Period.
Take advantage of what the market gives you and you will not have to worry about the market taking advantage of you.