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
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.
Do stocks tend to go up or down on Mondays? ›
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 Monday effect on the stock market? ›
History of the Monday Effect
2 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 a recurrent low or negative average return from Friday to Monday in the stock market.
Is Monday good for stocks? ›
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).
Are stocks more volatile on Monday? ›
The highest volatility occurs on Mondays for Germany and Japan, on Fridays for Canada and the United States, and on Thursdays for the United Kingdom. For most of the markets, the days with the highest volatility also coincide with that market's lowest trading volume.
Is Monday a bad day for stocks? ›
Stock prices fall on Mondays, following a rise on the previous trading day (usually Friday). This timing translates to a recurrent low or negative average return from Friday to Monday in the stock market.
What is the 3-5-7 rule in trading? ›
The 3–5–7 rule in trading is a risk management principle that suggests allocating a certain percentage of your trading capital to different trades based on their risk levels. Here's how it typically works: 3% Rule: This suggests risking no more than 3% of your trading capital on any single trade.
What is the 10 am rule in the stock market? ›
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? ›
In simple terms the rule states that: If a trending stock makes a new high after 11:15-11:30am EST, there is a 75% chance of closing within 1% of High of day (HOD). Same applies for downtrend.
Is it better to invest on Friday or Monday? ›
Monday is probably the best day to trade stocks, since there is likely considerable volatility pent up over the weekend. That said, Friday can also be a good day to trade, as investors make moves to prepare their portfolios for a couple of days off.
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.
Should I avoid trading on Mondays? ›
It's called the Monday effect or the weekend effect. Anecdotally, traders say the stock market has had a tendency to drop on Mondays. Some people think this is because a significant amount of bad news is often released over the weekend.
What time of day are stock prices lowest? ›
During the last 10-15 minutes before market close. Or about an hour after the market opens. And lastly to avoid the lunchtimes as it's generally the quietest time of the market day of you want to get the best price possible for either the buy or the sale.
What day of the week are stocks down the most? ›
However, some traders and investors believe that markets tend to trend downward on Mondays. This can mean much lower returns on Monday than there were to be had on Friday, making Monday traditionally known as a good day of the week to snaffle up potentially undervalued stocks and indices.
Is it better to buy stocks on Monday or Friday? ›
Mondays and Fridays tend to be good days to trade stocks, while the middle of the week is less volatile. Historically, April, October, and November have been the best months to buy stocks, while September has shown the worst performance.
Why do stocks crash on Mondays? ›
The “weekend effect” is a prominent trend noted in stock markets the world over. The weekend effect, sometimes also called the Monday effect, refers to an anomaly where the stock prices are high on Friday and comparatively lower on Monday when the weekend has passed.
What is the 10 am rule in 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.
