What is the Monday Effect?
The Monday effect predicts that performance in equity markets will reflect the trends that were influencing the market toward the end of trading the previous Friday.
How Does the Monday Effect Work?
The reasons for the Monday effect are not well understood. However, when reviewed in terms of weekly trading, on any given Monday, equity markets experience opening performance that mirrors Friday's closing performance.
To illustrate, suppose the Dow Jones closes on a Friday at 10,000, and it has been climbing steadily during the last hour of trading. According to the Monday effect, once the Dow Jones re-opens the next Monday morning, the upward performance will continue for the first hour or so of trading. From 10,000 the Dow Jones might climb during the early hours following the opening of the market.
Why Does the Monday Effect Matter?
Though the causes of the Monday effect are largely unknown, it has important implications for day traders and speculators as far as expectations regarding market behavior at the start of a given week.
