How the first day of the trading year impacts the rest of the year


Over the past 20 years…

  1. When the S&P 500 went up on the 1st day of the trading year, that entire year’s return was an average of +14.2%
  2. When the S&P went down on the 1st day of the trading year, that entire year’s return was an average of -0.6%.

Sounds like an interesting pattern, doesn’t it? Well it turns out you can’t trade on this pattern. As always, we must expand the data instead of cherry-picking the data.

Expand the data back to 1951

This is what happens when you expand the data back to 1951 (i.e. 67 years of historical data). Click here to download the data in Excel
When the S&P went up on the 1st day of the new trading year…

  1. It went up an average of +12.96% that year.
  2. The median was +10.86%. (I.e. the average was influenced by a few large outliers.)

When the S&P went down on the 1st day of the new trading year…

  1. It went up an average of +8.32% that year.
  2. The median was +6.9%

*Whether the S&P goes up or down on the 1st day is completely random. It went up 33 times and down 34 times.
As you can see, the difference between “up on first trading day vs. down on first trading day” isn’t as notable once you expand the historical data. It went from a 14% difference to a 4% difference. You cannot cherry pick the data.
You cannot make a full year’s trading decision based on small patterns like this, the same way you cannot make trading decisions based on the January Effect. These patterns do not have strong fundamental reasons behind them, and are prone to failure at any time.

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