Why shares go low Mondays and high on Fridays

And why Tuesdays aren't great for Australian investors. This is how mood, not rational decisions, sways the stock market.

| More on:
6 mugs with days of the week and moods

Image Source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

sdf

All share investors like to think they behave rationally.

But humans are not rational beings, and this is reflected in a phenomenon called the Weekend Effect.

This is the tendency for the market to produce higher returns on a Friday than Mondays, which tend to show lower or negative returns.

An analyst named Frank Cross first described the pattern in 1973 in an article in the Financial Analysts Journal.

There are several theories trying to explain why this would happen.

The simplest is that people, in general, are in a better mood on a Friday than a Monday.

"We find that investors' decision-making process in the stock market is affected by mood swing across weekdays," RMIT senior lecturer Angel Zhong. 

"Psychological studies show that people are affected by mood when making decisions and tend to respond to stimuli more positively when in a good mood and vice versa."

A related theory is that public companies "bury" bad news on a Friday afternoon after the markets close, so there is maximum time for investors to forget about it.

'Speculative' shares especially love Fridays

According to Zhong, the effect is more obvious for "speculative" shares as they're more exposed to emotional buyers and sellers.

"The impact of mood on decision making is pronounced when facing uncertainty. In the context of stock markets, making a decision with highly uncertain information corresponds to the valuation of speculative stocks, which are young, growing and highly volatile."

She said buy-now-pay-later shares like Afterpay Ltd (ASX: APT) and Zip Co Ltd (ASX: Z1P) are classic examples in 2020.

"Mood improves gradually from Monday to Friday ranging from the Monday blues to 'thank god it's Friday'," Zhong said.

"That means, investors are more pessimistic on Monday, thus pushing the prices of speculative stocks down. Investors are happier on Friday, hence viewing speculative stocks more favourably."

Tuesday Blues

Zhong specialises in behavioural biases in retail and institutional share investors.

The Weekend Effect theory originated out of the US, but Zhong has noticed a uniquely Australian phenomenon: the Tuesday Blues.

This is because Australian markets often follow the overnight behaviour of US markets.

US shares experience their Monday depression on Tuesday morning Australian time. Then the ASX follows that lead.

"That means on average, buy-now-pay-later stocks such as Afterpay and Zip tend to underperform on Monday and Tuesday," said Zhong.

"On Friday, when investors' mood improves, speculative stocks generate higher returns."

Tony Yoo owns shares of AFTERPAY T FPO. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of ZIPCOLTD FPO. The Motley Fool Australia owns shares of AFTERPAY T FPO. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on How to invest

Person handing out $50 notes, symbolising ex-dividend date.
How to invest

How to build a $1,000 a month passive income stream

Here are two strategies for generating a boost to your income.

Read more »

Woman looking at a phone with stock market bars in the background.
How to invest

Can't find ASX shares to buy right now? You're not alone

It's hard to find a good bargain in the markets right now.

Read more »

A little girl fills her jar up with coins with a smile on her face.
How to invest

Harness the power of compounding: 3 tips to turbocharge your ASX share portfolio

Compound interest can change your life if you let it.

Read more »

a smiling picture of legendary US investment guru Warren Buffett.
How to invest

What Warren Buffett would look for in ASX shares

Here's how you could invest like the Oracle of Omaha on the ASX.

Read more »

A smiling woman sits in a cafe reading a story on her phone about Rio Tinto and drinking a coffee with a laptop open in front of her.
How to invest

Where to invest $500 on the ASX as a first-time investor

Starting your investment journey? Here's what you need to know.

Read more »

Legendary share market investing expert and owner of Berkshire Hathaway Warren Buffett
How to invest

I'd listen to Warren Buffett and invest in ASX shares with wide economic moats

It could pay to follow in the footsteps of the Oracle of Omaha.

Read more »

Happy young man and woman throwing dividend cash into air in front of orange background.
How to invest

How to grow a $1 million portfolio with ASX shares

It's not as hard as you think to grow your wealth in the share market.

Read more »

Happy young couple saving money in piggy bank.
How to invest

How to create $50k in passive income with ASX shares

Here are four steps to take if you want to aim for a life-changing passive income.

Read more »