What happens to the stock market on Monday if it falls on Friday


Matt asked a question:

This blog also stated statistics that if Friday was a down market day, that Monday was usually met with continued downward momentum. Ever since reading this a few months back it seems that this is true that Friday down days are met with continued down days on Monday? Would you be kind enough to do a post on this, on the statistics about down Friday’s are met with continued selling on Monday’s??? Thank you so much Troy.

Thank you Matt for asking this question. Let’s clarify something first.

  1. This pattern only exists if the S&P 500 fell a lot on Friday.
  2. This pattern does not exist if the S&P fell a little bit on Friday (e.g. -0.2%).
  3. This pattern only exists during “significant corrections”.
  4. Using the S&P’s data since 1950, this pattern has only existed since the 1980s!

This pattern can be seen during a lot of market crashes (e.g. October 19, 1987). There’s a logical reason for this.
When the market tanks on Friday (e.g. down more than 3%), investors/traders reconsider their portfolios over the weekend. Then everyone hits the exit on Monday, and the stock market crashes.
Here’s the historical study. This is what happens to the S&P 500 on Monday when it crashes more than 3% on the preceding Friday. We’re using CLOSE vs CLOSE data.
*Let’s discount the bear market cases because the Medium-Long Term Model states that this is still a bull market.
June 24, 2016
This was the Brexit-related stock market correction. The S&P fell 1.8% on Monday, which was the bottom of the correction.

August 21, 2015
This was in the middle of a “significant correction” for the S&P 500. The S&P fell another 3.9% the next Monday.

June 4, 2010
This was in the middle of a “significant correction”. The S&P fell 0.4% the next Monday and made a lower low in July.

February 18, 2000
This was towards the end of a “small correction”. The S&P went up 0.4% the next Monday, but then continued to grind lower.

March 8, 1996
This was in the middle of a small correction. The S&P went up 1% the next Monday, but retested this low one month later.

November 15, 1991
This was in the beginning of a small correction. The S&P went up 0.6% the next Monday, and then continued to grind lower.

October 13, 1989
The S&P cratered on October 13. After making a significantly lower low, it closed higher next Monday (+2.7%). The S&P retested this low half a month later.

January 8, 1988
The S&P went up 1.6% the following Monday, but quickly gave back those gains.

October 16, 1987
This was the infamous crash of 1987. The S&P crashed 22% the next Monday.

Conclusion

  1. The S&P went up the next Monday in 5 cases and down in 4 cases.
  2. Average % change the next Monday: – 2.4% (this is skewed by the 1987 case).
  3. Median % change: +0.4%
  4. In all of these cases, the S&P either made a new low or retested the low in the next few weeks.

 

3 comments add yours

  1. Thanks for the post Troy,
    Also watching the markets over the past ten years, I have noticed seasonality holiday patterns, that could be profitable trading strategies based on positive sentiment leading up in the days ahead of major holidays. The psychology behind this, is that 2/3rds of the economy is based on retail spending. So if there is a pre holiday market selloff in the days leading up to major U.s. Holidays, it would create negative sentiment for consumer spending. I have noticed rallies in the market in the days leading up to the major u.s. Holidays, which include Memorial Day, 4th of July, Labor Day, thanksgiving, which are the 4 biggest spending u.s holidays. Not sure if there is relevant market data for a blog post, but it is interesting how this usually plays out. This past thanksgiving the weak before was a very small pullback then rally right into the holidays to increase positive consumer sentiment for retail spending. Thank you Troy.

    • Those are very interesting observations Matt. Have you tried to backrest this?

  2. Troy, I don’t have the right tools to backtest this? Can you write up a blog post on this when u get a chance??

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