The Day Of The Week Trading Strategy is also known as the Monday effect or the weekend effect and it describes the tendency for stocks to perform worse on Mondays than other days of the week, particularly Fridays.
This anomaly has been described in several academic studies and analysed across different international markets but it’s one of those anomalies that seems hard to rationalize.
One possible explanation is that investors become more optimistic as the weekend approaches and are more pessimistic on Mondays. Some academics (such as Lakonishok) attribute the weekend effect to the turn of the month effect anomaly. Others suggest that more bad news comes out over the weekend with more companies reporting negative earnings after Friday’s close.
Perhaps another explanation is that more short sellers exit their positions on Fridays and reinstate them on Mondays in order to avoid any upside risk over the weekend when the markets are closed.
However, as I will talk more about towards the end of this post, there are also some (e.g. Sullivan) who suggest that the anomaly is not significant and is probably the outcome of data mining.
In the next chart from Stern School of Business, you can see how Monday provided net negative returns in stocks between 1927-2001:
In the second chart, it’s clear that the weekend effect is fairly robust over international markets too:
Day Of The Week Trading Strategy:
You should be aware of the theory that stocks tend to fall on Mondays relative to other days of the week. This works in tandem with other strategies using our Evergreen Strategy.