“Trade the First Day, then Stay Away”

This morning, the WSJ reports on a new trading pattern: First day of the month rally:

“Some traders have been adopting a new ritual in recent months—buying early on the first day of the month and selling by the day’s close—taking advantage of a peculiar phenomenon that has seen the Dow Jones Industrial Average rise substantially on the first day of each month. That one-day move often has accounted for much of the Dow’s gains for the entire month.”

The article points to a likely source of the rally: Manufacturing data. It typically is released on the first day of the month. And, given the weak US Peso, “The manufacturing sector has been one consistent source of positive surprises during the economic recovery.”

Futures are strong this morning, with the SPX up 6, and the Nasdaq at plus 14, so yesterday’s rally does not look to be taking any steam out of the idea — yet.

These things tend to become self-fulfilling prophesies, at least for a while.

But one suspects that as these patterns become more widely understood, traders will anticipate them, and pull the gains forward. The Journal noted that the “last five days of the month have tended to see declines,” but I suspect that may no longer be the case (as yesterday’s rally showed).

Regardless, it is a phenomena that is worth watching . . .

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Source:
Much of Month’s Move Is on First Day
JONATHAN CHENG
WSJ, MARCH 1, 2011
http://online.wsj.com/article/SB10001424052748703749504576172862754957434.html

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