Tuesday, July 18, 2006

How the Market Rewards Risk-Taking: Day of the Week and the Dow

Since 2000 (N = 1642 trading days), the Dow Jones Industrial Average has lost a little more than 750 points. It turns out, however, that those points are hardly evenly distributed by day of the week.

On Mondays, the Dow has gained a cumulative 1932.63 points;
On Tuesdays, the Dow has gained 265.40 points;
On Wednesdays, the Dow has lost 466.45 points;
On Thursdays, the Dow has gained 1267.72 points;
On Fridays, the Dow has lost 3736.69 points.

In other words, if traders had simply bought at the close on Friday and sold at Thursday's close, instead of losing over 750 points, they would have gained nearly 3000 points.

Since 2006, the Dow is down on the year, but once again is up on a Monday through Thursday basis. Overall, since 2000, we have had 161 up Mondays and 169 down. Conversely, we've had 161 up Mondays and 147 down. (Interestingly, Mondays have not been profitable during 2006).

Could it be that risk-averse traders dump stocks on Friday, not wanting to hold positions over the weekend? If so, they've left an opportunity for those willing to assume risk by buying at the end of the week.


John Wheatcroft said...

Every day tigersharktrading.com posts an article by Art Collins called "the odds czar". One of the variables Mr. Collins uses is a day of the week model from Trade Station that looks like this:

1. Monday: Buy or sell in the direction of Friday's close-to-close net change.
2. Tuesday: Go opposite Monday's close-to-close net change.
3. Wednesday: Fade either Monday or Tuesday's direction, depending on which move was larger. (Plus or minus).
4. Thursday: Buy if the weekly high minus Wednesday's close was greater than the close minus the weekly low (and vice versa).
5. Friday: Fade the largest close-to-close move (plus or minus) of the last four days.

His post is generally pretty insightful and contains 13 or 14 other indicators that are not widely used but seem very useful when taken together. Suggest you take a look - should be an updated post for Monday on the site tomorrow.

Brett Steenbarger, Ph.D. said...

Thanks much for passing that along, John. Those are very interesting rules, and I'll look at them in greater detail. I do find that more original/not widely used indicators are often the most promising.