Here's the top of the Wall Street Journal's market-wrap story from today's paper, about yesterday's market activity: "An analyst upgrade of Wal-Mart Stores and a partial comeback in the financial sector Monday afternoon helped the stock market post a fifth consecutive rise ahead of today's Federal Reserve rate-policy meeting. The Dow Jones Industrial Average traded in the red most of the day before ending with a 17.46-point gain, up 0.2%, at 10642.15, and up 0.8% over its five-day rally."
Here's how the New York Times explained it: "energy shares keep the market lower for much of the day, but a late turnaround in financial shares helped offset those losses. By the end of trading, the Dow Jones industrial average and Standard & Poor's 500-stock index had ventured into positive territory, while the Nasdaq was lower. The day's volatility reflected a tug of war between investors who believe the recovery is plodding forward at a steady pace and those who doubt its durability. Some traders see the lack of a consensus as an opportunity to sell short, analysts said, while longer-term investors have thrown in money in hopes of profiting from a recovery that is slowly gaining steam."
And here is the explanation from the Financial Times: "US stocks closed broadly higher on the session on Monday following Senator Chris Dodd's presentation of the finalised version of his financial regulation reform bill, but fears that the Chinese government would ramp up its monetary tightening efforts following comments by Wen Jiabao, Chinese premier, over the weekend weighed down on sentiment. Moderately better-than-expected US industrial production figures and some positive corporate news provided some further support."
Explaining what makes markets go up or down is often more art than science -- after all, there's no requirement that buy or sell orders come with explanations attached. But it is interesting, at least to me, that none of the three major papers note the 15th-of-the-month effect.
Here is an explanation of the "first day of the month" effect from a Wall Street Journal blog post by James Altucher headlined "Ten Things I Learned While Trading for Victor Neiderhoffer":
The First Day of the Month. It's probably the most important trading day of the month, as inflows come in from 401(k) plans, IRAs, etc. and mutual fund have to go out there and put this new money into stocks. Over the past 16 years, buying the close on SPY (the S&P 500 ETF) on the last day of the month and selling one day later would result in a successful trade 63% of the time with an average return of 0.37% (as opposed to 0.03% and a 50%-50% success rate if you buy any random day during this period). Various conditions take place that improve this result significantly. For instance, one time I was visiting Victor's office on the first day of a month and one of his traders showed me a system and said, "If you show this to anyone we will have to kill you." Basically, the system was: If the last half of the last day of the month was negative and the first half of the first day of the month was negative, buy at 11 a.m. and hold for the rest of the day. "This is an ATM machine" the trader told me. I leave it to the reader to test this system.
Those same 401(k) plans that are investing on the first of the month are also investing on the 15th of the month for the many companies whose payroll cycles are twice a month and who have their employees invest through payroll deduction plans. What's more, there's a reinforcement effect, as the demand for stocks by the mutual funds administering the 401(k) plans is magnified by all the traders out there who have heard that it's an "ATM machine" to trade ahead of the mutual funds and the 401(k) plans. It becomes a self-fulfilling, self-reinforcing prophecy.
I mention this not as investment advice -- I've never traded actively to take advantage of either the first of the month or the 15th of the month phenomenon, and I haven't even rigorously back-tested it -- but more by way of press criticism and as an example of how sometimes if a narrative is repeated often enough it can make itself true. If enough traders think the first of the month or the 15th of the month is an ATM machine, that belief can help it become one. If enough government officials and journalists and fund managers describe certain assets as "toxic," they can become so.