Schaeffer's Trading Floor Blog

The Best Allocation Strategy of 2014?

Examining the recent day-of-the-week biases

by 4/30/2014 7:35 AM
Stocks quoted in this article:

Why don't I like Mondays? Or Fridays?

Well, I'll tell you. Market returns in 2014 have taken on an odd twist this year. The best strategy has clearly involved selling options volatility and ignoring the day-to-day noise and ultimately collecting the premiums. But the best allocation strategy has been to buy Monday's close, sell Tuesday's close, and go away.

Prior to yesterday, the SPDR S&P 500 ETF Trust (SPY) lifted on 15 of the 17 Tuesdays for an average gain of 0.55%. Here's a table showing the average SPY returns each day of the week this year, the "Win" Rate on each day of the week (% of positive days), and the returns of a new exchange-traded fund (ETF) I'd love to file for. It's an ETF that holds SPY close-to-close each day of the week and sits in cash for the rest of the week.

SPY performance by weekday in 2014

Yes, that's right. An ETF that owns stocks only on Tuesdays was up 9.14% in 2014. The only other ETF that's in the green is a Wednesday ETF, and it wouldn't even cover the massive fees I would charge for my new ETF family.

The Friday ETF looks horrendous, which makes some sense. It feels like there's a market freak-out heading into every weekend. No one wants to hold and give Putin three days to invade somewhere. Or have the Malaysian economy implode. Or whatever. It's always something this year.

More surprising is that we don't recover at all on Mondays when we return to find the world still intact. It's quite the opposite; we tend to follow through on the downside. But clearly that resolves itself by Tuesday … at which time we boom.

In my humble opinion, that's the dynamic that's playing out here. It's a Fear spike that takes an extra day to play out. Tuesday has become the unwitting beneficiary. After all, as we all know, Tuesday has no feel.

It all has implications for our options pricing structure. As I often mention, in "normal" times, Fridays see declines in basic volatility indices. as traders lower bids ahead of weekend time decay. But in "abnormal" times, the reverse dynamic takes hold. Traders/investors fear weekend news and Monday gaps and want to hold their options. We've seen a long string of "abnormal" in 2014, which suggests that perhaps Fear of Weekend News is now the new normal.

Anything's possible, but I'd guess that at some point, the Weekend Fear Buyers lose interest and these day-of-the-week biases that we've seen so far in 2014 revert back to the "old" normal. There's no history of Tuesday winners over time, I doubt that what we've seen in 2014 proves to be anything more than a little noise within a small sample size.

Disclaimer: Mr. Warner's opinions expressed above do not necessarily represent the views of Schaeffer's Investment Research.


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