Did you notice that stocks rallied strongly yesterday? The S&P 500 was up 1.67%. Do you know why the market was up? It may have been the strong manufacturing data reported by the Institute of Supply Management (ISM). The ISM numbers beat expectations. But stocks may have risen for another reason. Yesterday was the first trading day of the month.
Since August 1 of last year, the first trading day of the month has accounted for a disproportionate share of stock-market gains. In the 128 trading days between July 31, 2010, and February 1, 2011, the S&P 500 gained 206 points. Of those points, 123 were gained in only seven trading days. Those seven trading days were the first trading days of August, September, October, November, December, January, and February.
My chart shows the performance of a hypothetical portfolio that captures only the return of the first trading day of each month. Such a strategy would have gained 11% over the last six months, compared to a gain of 18% for a buy-and-hold investment in the S&P 500.
Is the first-day-of-the-month phenomenon just a coincidence? Probably, but with a plethora of quantitative high-frequency traders dominating markets today, this phenomenon could turn into a self-fulfilling prophecy.
Should you try to trade on the first-day-of-the-month phenomenon? I wouldn’t. Without understanding why stocks are earning a disproportionate share of their gains on the first trading day of each month, you are speculating. There are of course theories on why stocks rise the most on day one of each month, but they are based on shaky ground. Nevertheless, this is a noteworthy phenomenon that you might consider the next time you need to generate funds from your portfolio.
