Tuesday reverses Monday

Do market returns on Tuesdays reverse those on Monday?

We first looked at this in 2013 (in this article), so time to see if anything has changed.

First, the following updates the chart to 2016 plotting Tuesday returns for the FTSE 100 Index split by whether the previous day’s returns were positive or negative. Two time periods are considered: 1984-2016 and 2000-2016.

For example, for the longer period, the average return on Tuesday when Monday was up is 0.02%, while the average Tuesday return when Monday was down is 0.09%.

FTSE 100 returns on Tuesdays when Monday was up-down

While the figures have marginally changed from the previous study in 2013, the overall finding is the same: namely that the theory that Tuesday reverses Monday does not seem to hold. Since 1984 it has done so when Monday returns have been negative, but not when they have been positive. 

As in the 2013 study, the theory has been valid for the market since 2000.

The previous study suggested that further analysis might include a filter on the size of the Monday returns. This is done in the following chart, where Tuesday returns are only considered if Monday’s returns were beyond a certain threshold (i.e. of a certain size). The (arbitrary) threshold chosen was 1 standard deviation for Monday’s returns.

FTSE 100 returns on Tuesdays when Monday was up-down (1SD filter)

It can be seen that limiting the analysis of Tuesday returns to just large movements on Monday (i.e. beyond 1 standard deviation) does help the reversal theory. In this case, if the market rises on Monday, then on average it falls the following day (albeit a pretty small average fall), and if the market falls on Monday, the market rises (fairly strongly) on the Tuesday.

Let’s now look at how the theory has been holding up in recent years.

Recent years

The following chart is similar in design to the previous charts, but this time it plots the reversal results for the discrete years 2013 – 2016.

FTSE 100 returns on Tuesdays when Monday was up-down [2013-2016]

First, when the market is up on Monday, all four of the past four years has failed to support the reversal theory as Tuesday has followed with positive returns as well. When Mondays are down, in three of the past four years Tuesdays have seen positive average returns (the exception being 2015).

Exploiting the reversal effect

OK, so how to exploit this?

The following chart plots the cumulative value of a portfolio that invests in the FTSE 100 just on Tuesdays when the previous day saw negative returns. For the rest of the time it is in cash.

In the 2013 study a variant portfolio was also considered, that as well as going long Tuesdays following negative Mondays also went short Tuesdays following positive return Mondays. There’s currently not much point in considering this as the reversal effect is not working for positive Mondays.

So, instead the variant second strategy studied here is as above (i.e. long Tuesday following a negative Monday) but with a 1 standard deviation filter applied to the Monday return (i.e. the strategy only goes long on Tuesday if the Monday negative return is a greater than 1 standard deviation return).

Strategies exploiting the Tuesday reversal effect [2000-2016]

Since 2000 it can be seen that the simple long Tuesday strategy out-performs the benchmark buy-and-hold FTSE 100 portfolio. The variant 1SD strategy only marginally out-performs the simple long Tuesday strategy, but does so with with a greatly reduced volatility.

 

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Tuesdays are now the strongest day of the week

Earlier this year the Dow Jones Industrial Average rose on 20 consecutive Tuesdays – an unprecedented streak since records began.

A little earlier in the year the FTSE 100 Index rose for 10 consecutive Fridays. Not as remarkable as the Dow streak perhaps, but still impressive.

The following chart shows the average positive returns for the FTSE 100 Index for the five days of the trading week since the index was started in 1984.

Monday to Friday FTSE 100 performance

Since the 1984 the strongest day of the week has been Friday; the FTSE 100 Index has had a positive return on 55% of all Fridays. The weakest day has been Monday, the FTSE 100 Index has had a positive return on 50% of Mondays.

For comparison, the following chart shows the same data but just for the period of the first six months of 2013.

The relative strengths of the days for the first half of 2013 is similar to that since 1984; for example, Monday is still the weakest day. However, Tuesday has overtaken Friday as the strongest day of the weak; the market has risen 69% of all Tuesdays in 1H 2013.

The strength of Tuesday in 1H 2013 can be seen even more in the following chart which plots the average return of the FTSE 100 Index on the five trading days of the week.

In 1H 2013 the average index return for Tuesday was 0.4%, compared with just 0.13% for Friday (and negative for all other days of the week).

 

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Tuesday reverses Monday

Some traders believe that Tuesday’s market reverses Monday’s. In other words, if the market rises on Monday it will fall the following day, and vice versa.

Is this true?

The following chart shows the change in the FTSE 100 Index on-

  1. Tuesdays when the market has risen the previous day (Monday up), and
  2. Tuesdays when market has fallen the previous day (Monday down).

The data analysed covers two periods: 1984–2012 and 2000–2012.

For example, in the period 1984-2012, the market rose on average 0.02% on Tuesdays following a Monday increase.

FTSE 100 returns on Tuesdays when the previous day was up/down

As can be seen, for the longer period of 1984-2012 the theory that Tuesday reverses Monday does not seem to hold. For this period, when the market falls on Monday the return is positive the next day (which is fine), but when the market rises on Monday, average Tuesday returns are positive as well (i.e. no reversal).

However, since 2000 the theory appears to be working rather well. Tuesday returns have on average been the reverse of Monday. In fact, when the market is down on Monday, the average returns the following day have been five times greater than the average returns on all days since 2000.

How can this be exploited?

The following chart shows the value of three portfolios since 2000 (all starting with a value of 100):

  1. Portfolio 1: tracks the FTSE 100 Index
  2. Portfolio 2: if the market is down on Monday this portfolio goes long the market at the end of Monday and closes the position at the end of Tuesday (for four days out of five the portfolio is in cash)
  3. Portfolio 3: similar to the above, with the addition that it also goes short the market on Tuesday if Monday was up

Portfolios exploiting the Tuesday effect

By 2012 the market portfolio (portfolio 1) value would be 82, portfolio 2 would be worth 148 and portfolio 3 would be worth 196.

It’s interesting to observe that both portfolios 2 and 3 performed well during the steep market fall in 2007-08. Although of late the profitability of portfolio 3 has been falling.

The chart below looks at the effectiveness of the theory on a year-by-year basis for the period 2008-11.

FTSE 100 returns on Tuesdays when the previous day was up/down

It can be seen that while the theory worked well in years 2008 and 2010, it did not do so well in 2009 and 2011. The difference in profitability of portfolios 2 and 3 in 2011 is attributable to the market rising (relatively) strongly on Tuesdays following a positive Monday.

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