It has been the most wonderful day of the week for stock investors since the beginning of last year. This day is Tuesday. And the differentiation of performance on this particular day of the week says a great deal about the structural integrity upon which the market is operating today.
Historically, the performance differential for the stock market across days of the week has been fairly small. Overall, stocks as measured by the S&P 500 Index (NYSEARCA:SPY) have had a 52.93% daily winning percentage over the last 65 years since 1950, or gains in 8,566 out of 16,183 total trading days. The daily winning percentage over this same time period for each specific day of the week is shown below:
In short, stocks have been higher more than they have been lower on a daily basis on each day of the week with the exception of Monday. And the total difference range in winning percentage over time has been less than 8 percentage points.
The average daily return differential across these five days of the week is an even tighter spread. Overall, the S&P 500 Index has experienced an average daily return of +0.03% over the past 65 years, with the breakdown by day of the week shown below.
Once again, Monday is the only day of the week that historically been down on average with all others positive. But the average returns differential between the highest and lowest returning day of the week is a mere 14 basis points.
Having all of this information in mind helps to emphasize how utterly improbable the stock market's recent performance has been on Tuesdays. Two prolonged periods since the beginning of 2013 have been particularly notable in this regard. The first is the beginning half of last year from January to June 2013. The second is the year-to-date period from this January through to today.
During this aggregated time period, the stock market as measured by the S&P 500 Index has traded higher on 58.05% trading days, or 119 out of 205. While this is certainly a very strong winning record, it is not outside the realm of normal, as we have seen stocks post even better winning percentages over even longer periods of time throughout history.
But it is how these winning days have been so heavily concentrated on Tuesdays that begins to raise an eyebrow. Such are the daily winning percentages shown below.
Three days of the week - Monday, Wednesday and Friday - are all below their historical daily winning average by a few percentage points. Thursday, on the other hand, is above its historical daily winning average also by a few percentage points. Nothing necessarily unusual here so far. But the day that sticks out as glaring outlier is Tuesday with a daily winning percentage in the first half of 2013 and year to date in 2014 of over 83%, or higher in 35 out of 42 trading days, which is more than 30 percentage points above its historical average. This is an astounding difference.
What is just as notable is the average daily returns performance across these days during this aggregate time period.
Basically, nearly all of the market returns in the first half of 2013 and almost any positive return thus far in 2014 has come on Tuesdays, as every other trading day of the week is flat to down and below their historical averages. Tuesday, on the other hand, is posting an average daily return over this time period that is twelve times higher than its historical average.
So which specific areas of the market are benefiting most from this remarkable Tuesday outperformance? Not surprisingly it is the higher risk market segments.
For example, on Tuesdays during this aggregate time period, high beta stocks (NYSEARCA:SPHB) and small cap growth stocks (NYSEARCA:IWO) have gained on average +0.65% and +0.64%, respectively. More specifically, biotechnology stocks (NASDAQ:IBB) have been up on average a whopping +0.93% on Tuesdays during this time period. These results compare most favorably to lower volatility (NYSEARCA:SPLV) stocks that are up a still impressive but far more modest +0.39% on the second business day of the week during this time period. What about the rest of the days of the week? High beta, small cap growth and biotechnology stocks are down anywhere between -0.07% to -0.10% on average across all other days of the week, while their lower volatility counterparts are still higher on average by a far more modest +0.01%.
In summary, Tuesday has taken on a disproportionately large importance during the trading week, and this is particularly true for the higher risk areas of the market.
But the fact that a specific day of the week like Tuesday stands out with such contrast against all other trading days says a great deal about the overall market environment in which stock investors are operating today. Sure, investors can cite a number of potential explanations as to why stocks are doing so much better on Tuesdays lately, but it is extremely difficult to rationalize results that are 30 percentage points higher than the historical average as being anything within the realm of normal behavior.
Instead, the recent Tuesday phenomenon highlights two key points that investors should keep in mind as we move forward. First, a variety of forces have been influencing the stock market in recent years that likely fall outside of anything that can be reasonably explained through fundamentals, technicals or even behavioral factors. Second, the fact that we are witnessing such an unusual performance outlier on a specific day of the week is just another example of how distorted the post crisis stock market remains today.
None of these are reasons to abandon the stock market, particularly as it steadfastly remains in a cyclical bull market phase. But what it does emphasize is that a heightened attention to risk is required as the graying bull market continues to age, for just as these unusual mechanical anomalies like Tuesday can work in favor of investors, so too can they cut the other direction and often when investors least expect it. So in short, continue to enjoy the stock market ride, but be careful out there.
Disclosure: This article is for information purposes only. There are risks involved with investing including loss of principal. Gerring Capital Partners makes no explicit or implicit guarantee with respect to performance or the outcome of any investment or projections made. There is no guarantee that the goals of the strategies discussed by Gerring Capital Partners will be met.
Disclosure: I am long SPLV. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.