Call it the "Bull Market Monday" syndrome.
In fact, if weren't for the last month and a half of Mondays, the U.S. stock market would be a very dour place right now.
Since the start of the 2009 fourth quarter, the Standard & Poor's 500 Index has posted positive returns on 14 of the last 16 Mondays, with an average gain of 0.85% on that first day of the week (See accompanying graphic), the Bespoke Investment Group said in a research report last week.
However, since the start of October – for the other four trading days of the week – the S&P 500 has experienced an average decline of 0.21%, and has posted positive returns only half the time, Bespoke found.
For someone holding only the S&P 500 on Mondays since the fourth quarter began – buying at the close of Friday trading and selling at the close of Monday trading – a $100 stake would have increased in value by more than 13%. Conversely, a $100 stake held only on the other four trading days – that is, a stake bought at Monday's close of trading and sold at the close on Friday – would have dropped in value to $95.44 during the same period.
For U.S. investors, there are some powerful lessons hidden within all these numbers. You just have to take care in how you interpret the numbers, says Keith Fitz-Gerald, a former professional trade advisor who now serves as the chief investment strategist for Money Morning.
Mondays Shift From Bloody to Bullish
This is somewhat contrary to the old conventional wisdom holding that Mondays are bad news days, but the statistics bear it out. That negative view of Mondays was based on studies that found that Monday S&P trading fell by a 5-to-3 ratio, Bespoke Investment said.
But by the middle of the first decade of the 2000s, a long-term shift was taking place and "bloody Mondays" were becoming marvelous Mondays. In fact, in the last quarter of last year, S&P 500 returns for Mondays were in some cases higher than 2%, while the rest of the week showed an anemic 0.04% increase.
These statistics are instructive, because they drive home a key point, Fitz-Gerald says.
The day of the week doesn't really matter: Although Monday's the hot day right now, that could easily change – anointing a different day as the one that makes stocks sizzle.
In that sense, the current Monday bull market syndrome is important because it reminds us of the two key ingredients for investment success:
- Investors who miss the market's best days typically doom themselves to subpar returns – or worse – the complete annihilation of their portfolios
- Investors who miss the worst days can actually see their portfolios soar in value.
Let's look at each of these in more detail.
Why it Doesn't Pay to Miss the Stock Market's Best Days
Missing the market's best days can ruin an investor's returns. University of Michigan research found 96% of market gains between 1963 and 2004 occurred on only 0.9% of the trading days.
That's an even narrower window than the one identified by earlier Michigan research on the subject, research that found that between 1963 and 1993, 95% of market gains came on a slim 1.2% of the trading days.
How does that translate into real money?
According to research studies conducted by both Bespoke and Fitz-Gerald, $1 invested in the Dow Jones Industrial Average in 1950 would be worth a measly four cents today (excluding dividends) if an investor just missed the index's five best days. In other words, missing the five best days would have resulted in a loss of value equal to 96%. Ouch!
On the other hand, an investor who placed $1 in the Dow in 1950 – but who managed to miss the five worst days – would have $75,481 today (again excluding dividends).
These results highlight a point that Fitz-Gerald repeatedly makes during his presentations to investors all around the world: It is literally better to avoid the worst the markets have to offer than to obtain the best they have to give.
"Most of the damage to portfolio performance occurs during a very few months or days," concludes a study from FactSet Research. "The returns from trying and failing to be an outstanding market timer are highly likely to be less than simply owning Treasury bills."
Does that mean that "buy-and-hold" investing – in short, being "all in, all time" – is the only way to fly?
Absolutely not, says Fitz-Gerald. Investing success is actually a function of managing risks and returns.
"The real secret is to buy and manage," Fitz-Gerald says. "That's why investors like Buffett, Soros, Rogers, Templeton and others are so very successful."
The Formula for Investing Success
To achieve long-term investing success, an investor has to do two things, Fitz-Gerald says. First, you clearly want to be sure that you're there to capture the market's best days. But it's just as important to avoid the ruinous damage that can be inflicted by the worst days. And ironically, that's not achieved by market timing, which investors too often see as being either "all in" or "all out" of the market.
Instead, investors can put the odds strongly in their favor by following five strategies that are advocated by Money Morning. These strategies also are used by The Money Report, the monthly advisory service in which Fitz-Gerald, Martin Hutchinson and the rest of the Money Morning team writes about investment opportunities based on some of the most powerful global trends at work today.
The five strategies in question consist of:
- A Winning Allocation: From an overall portfolio standpoint, Money Morning 's Fitz-Gerald advocates a proprietary 50-40-10 allocation (Base Builders/Global Growth & Income/and higher risk-higher return "Rocket Riders"). This incorporates a set of built-in safety brakes, which are there whenever needed. Many investors discover the hard way that they can't handle as much risk as they thought. This allocation structure enforces portfolio-preserving discipline and risk control.
- Careful Individual Security Selection: From an individual-security standpoint, investors should look for companies that possess strong global brands that derive a substantial portion of their sales from faster-growing markets overseas, that have strong balance sheets and that feature a strong and safe dividend. The post-financial-crisis economy is no longer fueled by suspicious profit numbers and fancy accounting tricks; investors will increasingly favor large global companies with strong credit access, savvy management and bulletproof financial foundations (and balance sheets).
- Protect Your Winners: Take the emotion out of the equation – maintain a trailing stop loss (Money Morning typically recommend 25%) on each of your winners. If the stock continues to go up, the stop loss moves up in tandem. If the stock reverses course and starts to fall, chances are you'll keep the lion's share of your profit on that security – automatically .
- Dodge the Downside: Where market timing often involves being all in – or all out – of the market, the combined use of stop losses and selective hedges allows the investor to focus on risk management in terms of each individual security. Each stock you buy should carry a trailing stop loss – and 25% is as good a place to start as any. . Not only does this help capture gains, but trailing stops can help minimize losses before they get out of control, too.
- Winners Hedge: Hold 2% to 5% of your portfolio in truly non-correlated assets. One example: Inverse funds such as the Rydex Inverse S&P 500 Strategy ETF ( RYURX), which moves opposite the broad index. When the S&P falls, this rises in value. With such a strategy, you add a measure of stability – rather than timing – to your portfolio. And that ultimately makes things a whole lot more stable overall.
"Clearly it's important to capture the gains from the market's best days," Fitz-Gerald says. "But history shows that it's even more important to avoid the damage that can be inflicted by the market's worst days – especially if you can do it without destroying your upside by staying in the game and managing risk appropriately. Market timing is simply not cracked up to what most investors expect it to be."
News and Related Story Links:
- Bespoke Investment Group:
Monday Bull Market Continues
- The Boomtown Rats:
I Don't Like Mondays
- Towneley Capital Management/The University of Michigan:
Stock Market Extremes and Portfolio Performance (1926-2004)