Holding Positions Over the Weekend: Debunking the Monday Myth?

Warning: these results might fly in the face of generally accepted wisdom.

A “fact” commonly repeated by stock market pundits is the idea that traders should be wary of holding positions over the weekend. As the idea goes, a lot can happen from Friday’s close until Monday’s open and with markets closed, traders will be unable to react. Better to close positions on Friday and start the week fresh.

If this is in fact is correct, we would expect either (a) increased volatility on Monday compared to other days of the week as the market corrects for two days of news, or (b) increased volatility on Friday as traders close out positions en masse in preparation for the weekend.

click to enlarge images

The graph above is a 5-year rolling average of the standard deviation of % price changes on Monday (blue) and Friday (red) relative to all days (green) for the S&P 500 from 1950.  It shows that through the 1970s, 80s, and early 90s, Mondays were in fact consistently more volatile than other days of the week.  However, since the mid-1990s, Monday and Friday volatility has pretty much been in line with other days of the week (and at times like now, actually even less volatile).

So am I debunking the Monday myth?  Not exactly. 

I “smoothed” the data above a bit by removing the top and bottom 0.1% of days. These major market events (think 9-11, October 1987) would skew the results, so I dropped them from the sample.  There were a total of 29 of these outliers, 15 of which were massive down days.  Those 15 down days were distributed as follows:

This sample size (n=15) isn’t large enough to draw any conclusions that would pass scientific muster, but the results are clear enough to me: catastrophic down days have clustered around the very beginning (and to a lesser degree, the very end) of the week.

So in summary: generally speaking, Mondays and Fridays are not more volatile than any other day of the week; however trader beware, they (especially Mondays) do appear to carry a much higher risk of massive, fat-tail, black swan, portfolio-busting losses.

Comments

[Mark McHugh:]

This is an interesting and discussion-worthy topic. I always like to have a precious metals position over the weekend "just in case" something bad happens. It has not been a fruitful strategy so far, but I'm not comfortable abandoning it either. Holding a position is one thing, but closing and re-opening every weekend doesn't seem to make much sense.

It also seems that a lot of price action takes place when the market is closed to normal people, so by the time you and I can get in on something - it's over.

Hedging with puts can be an expensive habit, too. I almost wish somebody sold "weekend insurance."

2008 Aug 06 08:56 PM

[lobsterboy:]

Good idea with the article. I can tell you going long an option position can certainly be a unwise decision prior to monday. Not so much the position getting away from you but the decay of options. Sometimes its outright stealing.

2008 Aug 06 11:10 PM

[Michael S:]

RE: to Mark McHugh

I definitely agree with your statement that most price action occurs when the markets are closed (I think I'm interpreting that statement the same way you are).

Here's a little research showing market performance in daytime vs the overnight markets. In a nutshell, the bullish trend over the last 15 years has been the result of the overnight (not the daytime) market.

marketsci.wordpress.co.../

Also present in gold too...

marketsci.wordpress.co.../

Enjoy.

michael

2008 Aug 07 12:35 AM