What Is the Monday Effect?
The term Monday effect refers to a financial theory that suggests that stock market returns will follow the prevailing trends from the previous Friday when it opens the following Monday. According to the theory, if the market was up on Friday, it should continue through the weekend and resume its rise on Monday while the reverse is likely to occur if the market was down on Friday. The Monday effect is important for day traders and other market watchers who rely on it to predict where the market will move at the beginning of the trading week.
Key Takeaways
- The Monday effect is a financial theory used by some market watchers that states that Monday stock market returns follow those of the previous Friday.
- According to the theory, if the market moves up and closes higher on a Friday, it will open higher during the first few hours of trading on the following Monday and vice versa if it closes lower.
- It was first reported by Frank Cross in a 1973 article published in the Financial Analysts Journal.
- The Monday effect has been attributed to the impact of short selling, the tendency of companies to release more negative news on a Friday night, and the decline in market optimism a number of traders experience over the weekend.
- The Mondayeffect remains a much-debated topic.
Understanding the Monday Effect
There is no accurate way to predict where the market will head. That's because market movement depends on a number of different factors, including economic conditions, breaking news, supply and demand, government policies, and speculation among others. Market and stock watchers must come up with a strategy that can help them guess which way things will swing in order to make their moves. One of these techniques is the Monday effect.
As noted above, many day traders and market watchers use the Monday effect to help them figure out which way the market will move. According to this theory, the equity market is poised to replicate the returns from the close of Friday's trading day on the following Monday's market open. So if it closes up on Friday, it should open the same way the following Monday. If it drops before the close on Friday, the market will open lower on Monday.
Some studies show a similar correlation, but no one theory can accurately explain the existence of the Monday effect.The rationales or reasonsbehind the existence of theMonday effectare not well understood. But when reviewed intermsof weekly trading on any given Monday, equitymarkets experience opening performance that mirrors Friday's closing performance.
The Monday effect is sometimes known as the weekend effect, which describes the phenomenon that Monday returns are often significantly lower than the previous Friday's returns.
History of the Monday Effect
Frank Cross first reported the anomaly of the Monday effectin a 1973article entitled “The Behavior of Stock Prices on Fridays and Mondays,”which was published in the Financial Analysts Journal. According to Cross, the average return on Fridays exceeded the average return on Mondays and there is a difference in the patterns of pricing changes throughout the day. It usually results in arecurrent low or negative average return from Friday to Monday in the stock market.
Some theories say the Monday effect has a lot to do with thetendency ofcompanies to release bad news on a Friday, aftermarkets close, which thendepresses stock prices on the following Monday. Others think the Monday effectmight be attributedtoshort selling, which would affect stocks with highshort interest positions. Alternatively, the effect could simply be a result of traders' fading optimism between Friday and Monday.
The Monday effect has been a mainstay anomaly of stock trading for years. According to a study by theFederal Reserve, there was a statistically significant negative return over the weekends prior to 1987. The study did mention that this negative return disappeared between1987 and1998. Since then, volatility over the weekends increased again, rendering the phenomenon of the Mondayeffect a much-debated topic.
Example of the Monday Effect
Here's a hypothetical example to show how the Monday effect works. Let's saythe Dow Jones Industrial Average (DJIA) rose steadily during the last hour of trading on a Friday and closes at 20,000. According to the Monday effect, once the Dow Jones re-opens the next Monday morning, the upward performancewillcontinue for the first hour or so of trading. From 20,000, the Dow Jones may also riseduring the early hours of trading.
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FAQs
According to the theory, if the market moves up and closes higher on a Friday, it will open higher during the first few hours of trading on the following Monday and vice versa if it closes lower. It was first reported by Frank Cross in a 1973 article published in the Financial Analysts Journal.
What is Monday's effect in the stock market? ›
The Monday Effect is a theory in finance that the prevailing trends in the stock market on Friday will continue into Monday. In very simple terms, if the market is up at close on Friday, it'll continue to go up at the open on Monday, and vice versa. Some day traders rely on this theory to make trading decisions.
Do stocks usually go up or down on Monday? ›
What Is the Weekend Effect? The weekend effect is a phenomenon in financial markets in which stock returns on Mondays are often significantly lower than those of the immediately preceding Friday.
What will happen on Monday in the stock market? ›
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.
What is the best day of the week to buy stocks? ›
Timing the stock market is difficult, but understanding when to trade stocks can help your portfolio. The best time of day to buy stocks is usually in the morning, shortly after the market opens. Mondays and Fridays tend to be good days to trade stocks, while the middle of the week is less volatile.
Are mondays usually bullish or bearish? ›
It's called the Monday effect or the weekend effect. Anecdotally, traders say the stock market has had a tendency to drop on Mondays.
What is the 10 am rule in stock trading? ›
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.
What is the 11am rule in trading? ›
It is not a hard and fast rule, but rather a guideline that has been observed by many traders over the years. The logic behind this rule is that if the market has not reversed by 11 am EST, it is less likely to experience a significant trend reversal during the remainder of the trading day.
What is the 3-5-7 rule in trading? ›
A risk management principle known as the “3-5-7” rule in trading advises diversifying one's financial holdings to reduce risk. The 3% rule states that you should never risk more than 3% of your whole trading capital on a single deal.
What day of the week is the best for the stock market? ›
May be the best time of week to sell shares: Friday
Whether because of weekend optimism or because Saturday and Sunday's news hasn't been priced into the market yet, many traders feel that Fridays see stocks and indices priced higher.
The 3-Day Rule in stock trading refers to the settlement rule that requires the finalization of a transaction within three business days after the trade date. This rule impacts how payments and orders are processed, requiring traders to have funds or credit in their accounts to cover purchases by the settlement date.
Is Monday good for stocks? ›
The Most Lucrative Day. Many forums will tell you that Monday is the best day to buy stocks, while Friday is the best day to sell stocks. The logic behind this advice is that stock prices are said to be at the lowest on a Monday (meaning you will buy shares at a lower price).
What is worst month for stock market? ›
One of the historical realities of the stock market is that it typically has performed poorest during the month of September. The "Stock Trader's Almanac" reports that, on average, September is the month when the stock market's three leading indexes usually perform the poorest.
What time of day are stock prices highest? ›
Best Time of Day to Buy Stock
The market should rise the most during the first two hours of the trading day after the opening, which is from 9:30 a.m. until 11:30 a.m. EST for the NYSE.
Which month does the stock market go down? ›
Worst Months: January, February, March, August, and September are weaker periods.
Why do stocks drop on Mondays? ›
Others think the Monday effect might be attributed to short selling, which would affect stocks with high short interest positions. Alternatively, the effect could simply be a result of traders' fading optimism between Friday and Monday. The Monday effect has been a mainstay anomaly of stock trading for years.
Why not to trade on Mondays? ›
Here's why: Mondays can be tricky because the market is still getting into gear after the weekend. This means that there can be more volatility and unpredictability in the market, which can make it harder to predict which direction a currency pair will move in.
Is Monday a bad day to buy stocks? ›
Mondays: A Day of Adjustment
This theory suggests that stock prices tend to drop on Mondays due to negative news released over the weekend. As investors digest the news and adjust their positions, this can lead to lower prices, potentially providing a buying opportunity.
What is the negative Monday effect? ›
What Causes the Monday Effect? Proponents of the Monday effect provided several reasons why the stock market's action on Monday could mirror the Friday close. Short sellers often covered their positions on Fridays because the markets were closed over the weekends, leading to negative returns on Mondays.
