The first trading day of the month has produced the bulk of the stock market’s gains over two decades, writes Lawrence McMillan, editor of The Option Strategist.
Many traders are aware of the fact that the market rises on or about the first of the month, due to either or both of:
- month-end window dressing by institutional traders trying to make their month-end “marks” look as good as possible, and
- new money flowing into funds at the beginning of a month, due to payroll investment plans and other monthly contributions.
There are several trading systems built around this fact.
But there is an even simpler process at work at this time. According to Canadian economist David Rosenberg, 94% of the performance of the Standard and Poor’s 500 index in 2010 was from gains on just the first trading day of each month.
Specifically, the S&P gained 142.5 points in 2010, and if one had merely captured the gains on the first trading day of each month, he would have made 133.3 S&P points, or 94% of the total yearly gains.
No other positive year for the S&P has had that much success, but there have been a lot of successful years.
[So far in 2011, the first trading days of the first two months have been good for a combined 35.7 points, or 67% of the 53 points added by the S&P 500 since Dec. 31—Editor.]
Frankly, I was astounded by the data in the table below.
The bottom line is the summary. From Dec. 31, 1990 (when the S&P 500 was at 330.20) to Dec. 31, 2010, the S&P 500 has gained 927.4 points. Of that gain, 641 points (or 69.1%) came on the first trading day of the month!
The Quirk That Keeps On Working
There are some other interesting facts that can be gleaned from this data. For example, in 2000 and 2001, trading on the first day of the month made a profit (yellow highlights) while the S&P was actually down for the year.
Furthermore, in two other down years for the S&P—2002 and 2008—trading on the first day of the year lost money, but far, far less than the S&P did.
Only in 1994 did trading on the first day do worse in a down year than holding the S&P 500 for the year. However, losses on both the S&P and “first-day trading” were small.
Is this just a statistical anomaly? There are 240 months in the study, so that’s a good chunk of data, and thus the chances that it’s a statistical outlier are low, in my opinion.
Now Add Bank Interest
What does this mean? Think of the time and effort that could be saved. Work one day per month, and turn off the lights for the rest of the time. If you put the money back in cash for the rest of the month, you would have earned additional interest as shown in Table 2, which assumes that the dollar value of the S&P 500 was earnings interest during 353 of the 365 days of each year at the indicated rate.
Table 2: Interest Earned Over 20 Years
| Rate | Total Interest |
| 2% | 383.4 |
| 3% | 575.1 |
| 4% | 766.7 |
Of course, at the current time, the interest rate is essentially zero, but that won’t be the case over a 20-year period, so making the assumption that rates average 2%, say, is not unreasonable. If that were the case over the past 20 years, one would have earned an additional 383.4 S&P points to go along with trading gains of 641 points, for a total gain of 1024.4—more than the S&P’s gain of 927.4 points.
If rates were higher, the differential would be even larger. Moreover, if one used leverage the gains would be larger still.
This almost matches those spam emails you get: “Work just one day a month, from home, and make thousands!” Seriously, though, this is a very interesting set of data, which—at the very least—proves that there is extremely bullish sentiment on the first trading day of each month.
