Stock Market Analysis: When is the market most likely to go up?

June 3rd, 2011Jeff

This is obviously a question that all traders are attempting to answer, using many different forms of analysis, but today we will consider this by taking a look at the overall market on a day to day basis. To start we will consider days of the week.

Which day of the week is the market most likely to go up?

From the chart below we can see that Monday has been the standout performer for the last 10 years, with Thursday following along close behind. The blue line in the chart shows how often a day is higher or lower, with Thursday being up almost 75% of the time. As we established last week, Thursday has the highest win percentage of the weekdays.

The two bars show the average return and median return, which answers the question, how much does the market go up? There is a difference between the average return and the median return on Thursday while the two measures are more consistent on a Monday. Let me explain how this difference arises.

The average of a set of numbers is the total of all the numbers divided by the number of items in the set. The median of a set of numbers is simply the middle number when the set is arranged from smallest to largest.

If a set of numbers is normally distributed (which means they follow a bell curve around a centre point) then the average and the median will be similar. However, consider the following set of numbers 10, 10, 10, 10, 10, 10, 100,000: the average here is $100,060 divided by 7 = 14,294, while the median is 10. Obviously there is an enormous difference between these two numbers.

Stock market returns do not follow a normal distribution as more extremes occur than would be expected. A very high number biases the average up, while a very low number biases the average down. By considering the median and the average we can see whether the data is skewed by an extreme data point. In the data above Thursday’s performance is being pulled down by some bad Thursdays. These occurred in 2000 during the tech crash and if you can remember back then you’ll know it wasn’t just Thursdays that were affected.

Moving on to look at the week of the month we can build the following chart from the performance of the S&P/ASX 200. From this chart we can see the standout performer is week four, followed by week one. And remember to watch out for week two, it is definitely the “weekest”.

Expanding the time-frame one more time we can consider the strongest month, which is a close call between March, April, August or December. August does however come out ahead being higher over 80% of the time during the last 10 years. May, June and July are all weak which is right now, so do not expect a stellar performance from the stock market at this time of the year. This does not mean there is no movement, but on average the movement at this time of year cancels out, making picking the direction far more difficult.

These historical tendencies are a guide to what may happen in the market, but not a guarantee. The market is typically strong around the end and the beginning of the month. This did not happen last month and provides clues that there may be a larger fundamental movement underway. If the market is weak when it is normally strong then, it is likely to be very weak when it is normally weak.

Bu Jeff Cartridge
Education Manager

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