Three Theories That Explain Why The First Of The Month Is Usually A Positive Trading Day — With February behind us and a new trading month beginning. I wanted to put some credence into the belief that the first trading day of the month is positive.

From the start of last year, the first trading day of the month for the S&P 500 has closed higher 12 out of 14 times,  9 of those days with gains higher than 1%. Since the start of 2010, the S&P has risen 18.3%.  If you were to exclude the first trading days, it would only be up 2.3%.

Given this short-term analysis, we can see how important the first trading day of the month has been. Through reading other blogs and studies, the consensus seems to be that this day is usually a positive one and I will list some theories why:

1. Deposits from 401k come in, which the portfolio managers are able to put to work.

2. From the psychological aspect, as traders we all know how much of a mental game this can be. A devastating loss can crush your confidence, while a great investment can make you ecstatic. The first trading day brings on a fresh start allowing us to leave behind a bad month or continue riding the high tides of the month prior.1. Deposits from 401k come in, which the portfolio managers are able to put to work.

3.This comes from an article I read in USA Today, the “Window Dressing Affect”. This affect in essence is what allows portfolio managers to take off any investments that might be risky while adding to the positions that are working. One may call this fudging the books.

As we all know there is no sure thing in the markets, but we can see that there is some evidence to support first trading days as being positive ones. Although they are only theories why this might occur, it does add some support to the belief. There was also some chatter about this on our member chat today.  Some members stated they have had their biggest gains on the first of the month.

If tomorrow ends up a positive day that is 13 out of 15 and I might be a believer in this theory.

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