July 7, 2011 – The ‘Friday-Monday Effect’ Exposed


3)The 'Friday-Monday Effect' Exposed. If you bought every Friday close in 2010 and sold the Monday close, your return would have been 14.20%, versus a 7% return on the S&P 500. Virtually all the gains would accrue at the Monday morning gap opening.

If you did the reverse, bought the Monday close and sold the Friday close, then your YTD loss would be 11.00%. Apparently, the market is paying a huge premium for traders willing to run the weekend risk, which during the financial crisis, is when all the disasters occurred. I know of several desks that have been working this trade all year long, with much success. On paper you could have made 25.20% on a non-leveraged basis, and less once you take execution and other frictional costs out.

The longer this works, the more that will pile into it, until it blows up, as all of these purely quantitative approaches always do. This is symptomatic of a market dominated by short terms traders, arbs, and hedge fund where the end investor has fled. Expect things to get worse before they get better. By the way, don't try Googling the word 'exposed'. You'd be shocked, shocked.