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You only need to work 12 days a year?

According to Stock Trader’s Almanac, over the past 13½ years from September 1997 to February 2011, if one were to buy the Dow Jones Industrial Average at the end of the last trading day of each month and sold it at the end of the first trading day of the next month, it would have ended up with a total gain of 6,021 points for just 162 days work.

On the other hand, if it were to trade on the 3,215 other days, it would have lost a combined 1,604 points over the same period.

Such phenomenon could be explained psychologically. First, the beginning of the month represents a blank piece of paper for many investors because they measure their performance monthly. The previous bad or good month can be forgotten about.

Secondly, it could become self-fulfilling, as more traders spot the trend and buy and sell because of it.

As a matter of fact, the release of monthly manufacturing data from round the world on the first trading day also plays a big role. Equity market surges in September, December, January and February in the past year all coincided with stronger-than-expected data.

However, since the market trough in March 2009, the trend has worked but less well than previously – S&P has gained 655 points since then, whereas the first-day strategy brought in 200. And on 1 March 2011 markets fell.

Source: Financial Time, 20110301, “First of the month advantage”


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