Dow Jones Trading Strategy: First Trading Day of the Month
New month, new luck? - On the first trading day, the Dow Jones historically achieves a significantly higher return on average than on the other trading days of the month. How can you use this effect for yourself?
New month, new luck? - On the first trading day, the Dow Jones historically achieves a significantly higher return on average than on the other trading days of the month. Interesting trading opportunities can therefore arise for day traders during this period.
In the observation period from 1 January 1998 to 31 December 2022, the Dow Jones Industrial Average rose by 296.95% or +28705.91 index points within 6505 trading days. During this observation period, only 300 trading days fall on the first trading day of the month. However, interestingly enough, these 300 trading days contribute to around 35% of the increase in the observation period.
The trading strategy in brief: First trading day of the month
The Dow Jones trading strategy is traded once a month, i.e. only 12 times a year. There are various variations and trading systems that attempt to exploit this effect. The starting point, however, is a very intuitive assumption. A long position in the Dow Jones (Wall Street) is opened at the closing price of the last trading day of the month and closed again at the closing price on the first trading day.
Can the Dow Jones strategy also be used for other stock markets?
Due to the strong positive correlation between the US stock indices, we can also find similar results in the S&P 500 and also in the technology index - Nasdaq 100. The trading strategy can therefore also lead to similar and even better results. A similar phenomenon can also be observed in the European stock markets, such as the DAX 30.
First trading day effect
Dow Jones Strategy - The first trading day makes a significant contribution
Out of 28705.91 index points, 10152.35 points were gained on the first trading days alone. On the remaining 6205 trading days, the Dow Jones gained 18553.55 points. On average, the Dow Jones gained 33.84 points on the first trading days and only 2.99 points on the remaining trading days. The first trading day of the month thus appears to produce significantly higher average point gains than the control group.
Trading Strategy Evaluation: 1st Trading Day of the Month for the Period 1998 -2022
On the whole, a clear positive trend can be observed in the Dow Jones on the first trading day of a month during the period under review. The first day in August performed the worst, with a gain in points only observed in 28% of the cases. The first trading day in February, June and July are the best months in the observation period, with 20 out of 25 hits (80%). However, the largest gain in points was achieved in March with a total of 1690.91 points.
The worst year for the first trading day in the period under review was 2014 with eight declines and a total annual loss of -820.86 points. Interestingly, the 2020 Corona crisis also brought two new records. The best and worst first trading days followed each other. The best first trading day was in March 2020 with 1293.96 points. This was followed by the worst first trading day in April 2020 with -973.65 points. In bull markets, the first days usually perform significantly better than in bear markets. The first trading days of the S&P 500 differ only slightly from the pattern of the Dow Jones. Therefore, the results can also be applied analogously to the S&P 500.
Dow Jones performance on the first trading day of the month (1998 - 2022)
Why does the Dow Jones rise on the first trading day of the month?
With seasonal price patterns it is not always so easy to pinpoint the individual explanatory factors. However, academic studies cite three major factors for the significantly higher rise on the first trading day of the month:
Increased demand for shares due to salary and pension payments.
Salary and pension payments are typically made around the world at the beginning of the month. Private investors use part of their monthly income to invest, in turn, a fixed amount each month directly at the beginning of the month through passive investment vehicles such as ETF savings plans. This recurring increased demand at the beginning of the month could describe part of the phenomenon.
Window dressing by institutional investors
The frequently cited effect of window dressing could also play a role in the first day of trading. This effect leads to liquidity being withdrawn from the capital market at the end of the month and added back at the beginning of the month. Institutional investors such as fund managers clean out their portfolios monthly, quarterly or even annually and sell positions shortly before the end of the month in order to stock up again at the beginning of the month.
Behavioral optimism at the beginning of the month
As the most important entity in the capital markets, people naturally also play a role with their habits and patterns. Private investors as well as institutional investors have resolutions not only at the turn of the year, but also, for example, at the beginning of a new month. From a behavioral economics perspective, investors might be more optimistic at the beginning of the month than at later points.
This information has been prepared by IG, a trading name of IG Markets Ltd and IG Markets South Africa Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.
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