Seasonalities in Stock Markets: The Day of the Week Effect (2024)

FAQs

What is the day of the week effect in the stock market? ›

Day of the Week Effect & its Possible Explanations

More specifically, according to this phenomenon, there are systematically negative returns on Monday and systematically positive returns on Friday.

As of result of this selling, stock prices decline. However, as soon as the December ends, people start acquiring shares and as a result stock prices bounce back. This lead to higher returns in the beginning of the year, that is, January month. This is called 'January effect'.

French (1980) found that the average returns from Tuesday to Friday were positive and significant while the return for Monday was significantly negative. Gibbons and Hess (1981) confirmed French's findings using the same Standard and Poor's 500 Stock (SP 500) index.

Stock market seasonal patterns are the directional tendencies of stock indices based on the time of the year. Certain times of the year tend to be more bullish (go up) for stocks, while other times during the year are more bearish (go down).

Mondays: A Day of Adjustment

Historically, Mondays have often been considered a good day to buy stocks, primarily due to the 'Weekend Effect' or 'Monday Effect'. This theory suggests that stock prices tend to drop on Mondays due to negative news released over the weekend.

The day of the week effect is one of the regularities observed in financial markets which suggests that Friday returns are higher than Monday returns.

One way to detect seasonality in a time series is to plot it and look for repeating patterns or cycles. You can also use autocorrelation and partial autocorrelation functions to measure the correlation between the values of a time series and its lagged values.

Seasonal effects are cyclical patterns that may evolve as the result of changes associated with the seasons. They may be caused by various factors, such as: weather patterns: for example, the increase in energy consumption with the onset of winter.

The Short Answer:

Earth's tilted axis causes the seasons. Throughout the year, different parts of Earth receive the Sun's most direct rays. So, when the North Pole tilts toward the Sun, it's summer in the Northern Hemisphere.

During a bear market, Mondays and Tuesdays are most volatile, and stocks tend to fall the most on these days. In contrast, Thursdays are good days to sell because stocks tend to rise during that day of the week.

What days of the week are best for stock market? ›

Monday is probably the best day to trade stocks, since there is likely considerable volatility pent up over the weekend. That said, Friday can also be a good day to trade, as investors make moves to prepare their portfolios for a couple of days off. The middle of the week tends to be the least volatile.

For instance, the “Monday Effect” is a phenomenon wherein stocks tend to experience a dip early in the week, which is often attributed to negative news released over the weekend. Alternatively, there's the “Friday Effect,” where stocks often see a rise on Friday as investors show optimism for the upcoming week.

“Sell in May and go away” is a well-known seasonal pattern in the financial markets that suggests that investors should sell their stocks in May and reinvest in November, as the markets tend to underperform during the summer months (May to October) and outperform during the winter months (November to April).

Some traders follow something called the "10 a.m. rule." The stock market opens for trading at 9:30 a.m., and the time between 9:30 a.m. and 10 a.m. often has significant trading volume. Traders that follow the 10 a.m. rule think a stock's price trajectory is relatively set for the day by the end of that half-hour.

The opening period (9:30 a.m. to 10:30 a.m. Eastern Time) is often one of the best hours of the day for day trading, offering the biggest moves in the shortest amount of time. A lot of professional day traders stop trading around 11:30 a.m. because that is when volatility and volume tend to taper off.

During a bull market, some say Fridays are best for buying because the stock market is most volatile and tends to fall the most then. On the other hand, Wednesdays and Thursdays are more likely to see stock prices rise.

Stock prices fall on Mondays, following a rise on the previous trading day (usually Friday). This timing translates to a recurrent low or negative average return from Friday to Monday in the stock market.

For buying stocks, Fridays aren't preferable as prices tend to be high. Mondays usually have lower stock prices historically. Therefore, some traders prefer to buy stock on Monday. The Weekend effect is also sometimes referred to as the Monday effect.

The weekend effect, sometimes also called the Monday effect, refers to an anomaly where the stock prices are high on Friday and comparatively lower on Monday when the weekend has passed. We take a look at how prominent the effect is, and some reasons behind it.