First Day of the Month Returns: What are They Telling Us?

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 |  Includes: DIA, QQQ, SPY
by: Toro

One of the market oddities this decade is that if you exclude returns from the first day of each month, the market is down quite substantially since January 3, 2000.

On Thursday, the S&P 500 closed at 1508.44. On December 31, 1999, it was 1455.22. Thus, excluding dividends, the U.S. stock market is up 2.7%.

However, the cumulative return of the first trading day of each month this decade is 27.8%.

And, Thursday did not help. The S&P 500 fell 2.64%, and experienced the fourth worst first-day-of-the-month return since the turn of the century.

The third worst day was January 2, 2001 when the market dropped 2.80%. The next day, Alan Greenspan cut the funds rate 0.50% to 6.00%, beginning the previous Fed easing cycle. The market proceeded to fall 40% over the next 21 months.

The worst two days were 19 and 20 months later when the market fell 2.96% on August 1, and 4.15% on September 3 of 2002. The market bottomed on October 10, and has not looked back since.

That is, until Thursday, perhaps. I still think we are going to see higher highs sometime over the next few months, but the sharp decline this session may be signaling a top as violent reversals and increasing volatility often do.