The Theory on Buying Stocks on the First Day of the Month

Buying stocks on the first day of the month was the hot trading tip for 2010. That year, the S&P 500 made more than 90 percent of its gains during the 12 days that represented the first trading day of each month. However, this is probably not a trend you can count on to make you rich and allow you to take the other days of the month off.

Background

The first decade of the 21st century -- 2000 through 2009 -- was a rough one for stock market investors. From Dec. 31, 1999, through Dec. 31, 2009, the market dropped about 9 percent, as measured by the Dow Jones Industrial Average. In 2010, several news organizations, including CNBC, USA Today and MarketWatch published articles with data showing that if investors had owned stocks only on the first trading day of each month, those losses would have instead become gains. CNBC reported that the S&P; 500 was up 28 percent for the decade if stocks were owned only on the first trading day of each month.

Performance

According to MarketWatch, the S&P; 500 stock index gained 12.7 percent that year. Adding up the results for just the 12 days representing the first trading day of each month, the gain would have been 11.9 percent. This is more than 90 percent of the S&P; 500 total gain for the year. The article then reported additional data back to 1990 to show that over the 20-year period, about 70 percent of the total S&P; 500 return could have been earned by just owning stocks on the first of every month.

Trend

Reports looking at the first-of-the-month stock gains phenomenon show that the majority of the time, stocks have gone up on the first day of the month. Depending on the time frame, stocks gained on about 60 percent of those days. After the 2010 news reports on the trend, the markets increased on about six out of 10 first-of-the-month trading days in 2011 and 2012. Theories on why this happens include a new attitude from investors to put money into the market on the first of the month, increasing "buy" orders. Another theory is that end-of-the-month 401(k) money coming into the market increases the demand for stocks.

Considerations

A strategy with just 12 trades a year and a 60 percent win rate probably does not work for most investors or traders. The average return for those single market days has been about 0.30 percent, producing a total average annual return of less than 4 percent. Also, it would be nearly impossible for an individual trader to get in and out at the exact opening and closing prices. The slippage could change the real results dramatically. Finally, there have been some big down days on the first trading day of the month, including a 2.8 percent down on Oct. 3, 2011, and 2.6 percent on Nov. 1, 2011.

Photo Credits

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About the Author

Tim Plaehn has been writing financial, investment and trading articles and blogs since 2007. His work has appeared online at Seeking Alpha, Marketwatch.com and various other websites. Plaehn has a bachelor's degree in mathematics from the U.S. Air Force Academy.

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