If it's Tuesday, take a break from investing

Were "Just another manic Monday" and "Friday I'm in love" your favourite golden oldies? It seems the songs are more appropriate for the stock markets.

For a lark, The Smart Investor studied Sensex upmoves and downmoves depending on the day of the week. We found that Mondays and Tuesdays are bad for investors while Fridays show the most number of positive closes by the Sensex in the last two years.

Sounds like hogwash? The day-of-the-week effect was first documented in a study by Osborne (1962) and has subsequently been examined in numerous studies. Such empirical observations have been mainly verified in the US.

In fact, equity markets across many countries seem to exhibit the day-of-the-week effect. Studies have also been conducted to identify the causes behind the patterns observed.

Institutional features of the national stock markets, such as settlement procedures and, in particular, delays between trading and settlement in stocks, pricing misquotes and measurement errors, specialists' behaviour and dividend patterns have been put forward as the main reasons for such an effect.

However, none of these reasons has been conclusively proved to be the cause of the effect.

Explanations of the day-of-the-week effect based on human nature have also been put forward to explain the patterns observed (Jacobs and Levy, 1988).

The human behaviour of disclosing good news quickly on weekdays and waiting for the weekend to disclose the bad news - presumably to give the market a w eekend to absorb the shock - is among the explanations provided for the day-of-the-week effect.

However, if one takes a look at data on the Indian stock markets in the last two years, quite a few surprises come to the fore. Surprise number one: The dreaded and much maligned Friday is the most positive day of the week. That is, on an average, the Sensex ended more Fridays on a positive note compared to the rest of the days of the week.

The daily average of the Sensex's gain for the two years was 0.17 per cent. A host of studies by experts shows that in the US, the last trading days of the week, particularly Friday, are characterised by positive movement and substantially positive returns (Cross, 1973; Lakonishok and Levi, 1982; Hirsch, 1986).

Says Nihar Dave, director, AKD Securities, "The main reason why people have a conception that Fridays are typically bad for the markets is because most investors have a psychological block about carrying over positions over the weekend and would prefer to square them off on Fridays".

Surprise number two: Mondays and Tuesdays produce the most negative returns. The average daily losses on Mondays and Tuesdays were 0.02 per cent and 0.04 per cent respectively.

Such an effect also seems to be present in the equity markets of other countries such as the US, Canada, Japan and Australia.

Tuesdays and Thursdays emerge the most volatile days of the week. Intra-day volatility (day's high minus day's low divided by day's high) was the highest at Tuesdays and Thursdays the most volatile days of the week.

Intra-day volatility (day's high minus day's low divided by day's high) was the highest at 1.60 per cent on Tuesdays and 1.59 per cent on Thursdays. Marketmen reason that the fact has some basis in the derivatives settlement that happens on Thursdays at the end of the month.

Does the day effect hold anything for investors? Marketmen take the findings of the study with a pinch of salt.

The most telling point was made by a leading broker: "The most negative statistic that I know about Mondays is that most heart attacks occur that day." It figures!