“Investors don’t want to be long heading into the weekend.”

How many times have you heard this quote, or something similar, since the European debt crisis first hit the headlines in 2010? With two full days for bad news to emerge out of Europe, the thinking goes, investors are better off cutting risk prior to the weekend. Just this past Friday, a director at a trading firm was quoted by CNBC as saying, “It’s difficult to be long this weekend … you’re gambling if you wish to be long going into the weekend. You have all the chaos in Greece, which doesn’t help matters.”

Click to Enlarge As is often the case, however, the conventional wisdom is in fact utter nonsense. An analysis of daily market returns during the two periods in which the European financial crisis had the largest impact on market performance (April 30-Aug. 31, 2010, and July 25-Oct. 3, 2011) shows the opposite is true.

The 2010 Downturn

Looking first at the four-month period in mid-2010 — during which the S&P 500 Index fell 13.05% — the best day of the week was actually Monday. The table below shows the average returns on each day of the week during that interval:

Monday also was the only day in which the market rose more times than it fell, with nine up and seven down.

There were two holidays in this time frame, so on two occasions Tuesday was the first trading day of the week. When this is accounted for and returns in the first day of the week are measured, the return still is positive, at 0.22%.

The lesson, then, is that an investor who sought to cut risk exposure on Thursday or Friday was selling into weakness and missing out on the positive returns that occurred on the first trading day of the following week.

The 2011 Slump

Was the 2010 down market an anomaly? Not necessarily, because the bear-market period in mid-2011 (which brought a loss of 18.2% in the S&P) shows a similar pattern:

To be consistent, it should be noted that there was one occasion on which the first trading day fell on a Tuesday. When that is accounted for, the return of the “first trading day” falls to -0.38%.

While Monday isn’t as strong as it was in the earlier period, again we see that the market was much weaker toward the end of the week than it was in the beginning. Further, the Monday return is skewed by the 6.66% decline of Aug. 8, 2011. Perhaps the memory of this 634-point down day for the Dow was burned into investors’ memories, fueling the myth that holding over the weekend is a risky bet.

Again, the conclusion is that there was no benefit to avoiding the risk associated with holding stocks over the weekend during periods of elevated fear. Oddly, this is not the case when the long-term data is measured. Author Thomas Bulkowski’s analysis of the daily returns of the S&P 500 from 1950 through 2010 shows that Monday was the day of the week on which the index was least likely to rise.

The bottom line: At a time of economic and political turmoil throughout the world, there’s no doubt that risk management is essential. But the next time you hear an analyst saying, “Nobody wants to hold stocks over the weekend,” it just might be the time to buy.