Weak Fridays: Leading indicator for Monday performance?
The US stock markets got slammed hard on Friday after two days of ’stability’ and last-hour bull runs. I remember people saying that weak Fridays are never good - investors & traders get the weekend to brood over the drop in their portfolio value, and mentally prepare to sell more on Monday. I would think that people have used historical data to test this hypothesis for the US markets - unfortunately a quick Google search didn’t find anything.
Nevertheless, I ran a test for the S&P CNX Nifty index to see if this phenomenon held for India. Here are some statistics:
For January 2000 through July 2007:
- Number of trading Fridays = 372, average change (from previous close to Fridy close) = 0.06%
- Average change next Monday = -0.07%, Correlation between Friday & Monday = 35%
- Number of down Fridays = 159, average change = -1.3%
- Average change next Monday = -0.5%, Correlation between Friday & Monday = 36%
- Number of down Fridays (drop > 1%) = 82, average change = -2.1%
- Average change next Monday = -0.8%, Correlation between Friday & Monday = 40%
- Number of down Fridays (drop > 2%) = 35, average change = -3.1%
- Average change next Monday = -1.1%, Correlation between Friday & Monday = 52%
It looks like the weaker the Friday, the higher the chances that the following Monday will see a drop in the market index. Yesterday, the Sensex & Nifty were up ~1%, so the above stats don’t directly apply.
However, given the 12-hour time difference, any correlation between US indices & Indian indices has a lag effect. A weak Friday in the US will have an impact only on Monday in India. Now there’s another hypothesis that can be tested.
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