The Weekend Effect in Stocks

The Weekend Effect in Stocks: Understanding, Strategies, Rules, and Backtesting

Is it smart to own stocks over the weekend? On of the biggest financial websites writes that the weekend effect is a phenomenon in financial markets in which stock returns on Mondays are often significantly lower than those of the immediately preceding Friday. Is it correct? Let’s find out if there is a particular weekend effect in stocks:

Backtests reveal that there is no (strong) weekend effect in stocks, neither negative nor positive.

Related reading: Seasonal effects and other trading strategies

Let’s run some backtests and find out how we reached that conclusion:

What is the weekend effect in stocks? Do shares go down at weekends? (The Friday Effect)

Many assets have seasonalities and biases, and the weekend effect in stocks might be interesting to investigate. For example, gold has for many decades had an edge from Thursday until Monday:

Can we find something similar for stocks? Let’s backtest:

Is there a weekend effect in stocks?

This is an effect that is very easy to backtest. We make the following trading rules:

  • We buy S&P 500 at the close on Friday and sell at the close the next trading day (normally a Monday, but sometimes a Tuesday if a non-trading day).

The equity curve looks like this for S&P 500:

What Is The Weekend Effect In Stocks?

Overall, it’s been a positive effect, but negative since the year 2000. The average gain has been 0.04%, but a negative 0.01% since 2001.

What if we exit on Monday morning?

The Friday effect in stocks

The effect is slightly more consistent, but nothing that is tradable.

Is there a spillover to Mondays when Friday is a very strong or weak day?

When Friday is a strong day, rising more than 1% more than the close on Thursday, we get the following performance from Friday to Monday’s close:

What is the weekend effect in stocks? Backtest

Again, we see no particular trend.

When Friday drops more than 1%, we fail to see any tradable patterns as well:

Weekend effect in stocks

We tried many other setups and trading rules, but none is worth pursuing.

What is the weekend effect in stocks? Conclusion

We fail to find any tradable weekend effect in stocks.

Instead, we recommend looking at the Turnaround Tuesday strategy and the Turn of the Month strategy, two of the strongest patterns there are:

FAQ:

What is the weekend effect in stocks?

The weekend effect in stocks is a phenomenon where stock returns on Mondays are believed to be significantly lower than those on the immediately preceding Friday. However, after conducting backtests, it’s revealed that there is no strong weekend effect, neither negative nor positive.

What is the history of the weekend effect in stocks?

The history of the weekend effect in stocks is explored through backtesting. While there was a positive effect historically, it turned negative since the year 2000. The average gain has been 0.04%, but it became a negative 0.01% since 2001. Contrary to the popular belief in a weekend effect, backtests show that there is no consistent trend of stock prices going down during weekends.

Is there a correlation between Friday’s performance and Monday’s outcome?

Backtesting trading rules based on buying S&P 500 at Friday’s close and selling at the close on the next trading day (normally Monday) does not reveal any consistent correlation or tradable patterns. The data indicates no specific trend related to Friday’s performance impacting Monday.

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