Friday – The Stock Market’s Opposite Day
Just when we think the week has established a trend, Friday comes along. With mediocre performance, or a complete reversal, the week’s last day can confuse and plants seeds of doubt.
What’s going on? There is actually a good reason for Friday’s independence. And there is an important lesson for us.
Friday’s uniqueness comes from active traders – investors focusing on short-term price moves. Typically, their gains are small, but, because they are earned quickly, can accumulate to a good annual return.
The trader’s first rule is to minimize risk. Small losses are acceptable and expected. But getting caught in a sizeable drop can wipe out many gains. A key technique to control risk is to avoid holding when markets are closed. Any adverse news, upon which a trader would normally sell quickly, can mushroom during the non-market hours, putting the trader into the middle of a selling frenzy when the market reopens.
For some traders, this means cashing out their positions by the end of each trading day. This activity can often be seen in the final hour of trading.
Other traders, working on short-term trends, are willing to hold overnight so as not to lose their positions. However, at week’s end, they, too, cash out. They view the two full days of illiquidity as being too risky. This, then, is where Friday’s independence originates. An apparent trend visible from Monday to Thursday can peter out and even reverse on Friday as these traders exit.
We can see this disjointed action by examining Monday to Thursday’s market movements, then Friday’s. The graph below shows the weeks from the stock market’s weekly closing low on March 6.
Clearly Friday seems to have a mind of its own. In the 34 weeks from the low, the Monday-Thursday market has fallen only 10 times, but Friday has dropped 16. Friday has reversed the Monday-Thursday trend 12 times, with 9 declines and 3 gains. Friday changed the entire week’s direction four times: one to up and three to down.
For the entire period, Monday-Thursday was the market, producing over 3,000 points of the Dow Jones Industrial Average’s 3,086 points. This split return personality shows on the cumulative graph below. Friday lost ground the last three seeks (-67, -109 and -250 points), removing its contribution to the market’s rise.
Now, about that lesson we can learn. Take daily market moves with a grain of salt. It’s okay to look for relevant trend information, but ignore the pundits and media reports that try to make the day’s moves into important news. Way too often, today’s conclusions are disproved by tomorrow’s market.
If you look at stock charts, focus on weekly plots. That way you will see the closing price that captures the important trends and removes the short-term trader noise.
