By Nicholas Santiago on January 22nd, 2010 12:44pm Eastern Time
The market has had a recent sell off from the January 19th, 2009 short term top in the Dow Jones Industrial Average(DJIA). Since that time the DJIA has fallen over 350 points. This looks as if it can be the start of a pullback or perhaps even a correction. Many of the leading stocks have been hit hard after earnings and this can be viewed as the catalyst. Companies such as American Express(NYSE:AXP), Capital One Financial(NYSE:COF), and Google(NASDAQ:GOOG) are just a few to come under fire since last nights earnings report. Really the negative reactions to earnings is a trend that has started since aluminum giant Alcoa(NYSE:AA) reported earnings about two weeks ago.
What does this mean for today? Over the past year or so we have had very few Friday's that have been down significantly on a Friday. In the past year there have been about 7-8 Friday's when the market has been down over 100 points. Therefore, today is really not a surprise to see this market trade around the flat line into the close.
Why do we see this phenomenon on Friday's? Ever since the financial meltdown in 2008 the markets have mysteriously been supported on Friday's. There have been a few reasons that one could suspect for this. First, the institutional money that controls the movement of the market does not want to spook the Asian markets over the weekend. Second, most crashes that occurred on Monday's usually started on Friday's as the negative sentiment and momentum just built up over the weekend causing a sharp Monday decline. Third, the powers that be do not want a bad headline on the evening news when people are getting ready to to shopping and spend money over the weekend.
Remember the average person will watch the news or read the newspaper over the weekend and just glance at the Friday's numbers. They are not paying attention to the day to day movements. This is why we call this the 'Friday Effect'.
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