About half of the money in the stock market comes from retirement accounts (primarily 401K's). That's part of the reason for the bullish 80's and 90's especially for large cap stocks. As 401K's became more popular as opposed to defined benefit plans, money started pouring into the stock market, creating significant upward pressure on stocks. Most market participants preferred (as they still do today) to put their money into the stocks of known companies. In doing so, they inflated the prices of large caps in the last few years of the 1990's. Here is the interesting part though. If half of the money in the stock market is in retirement accounts, when does that money enter the markets?

Answer: most of the money enters the markets after the 1st and 15th of the month. Mutual fund managers find themselves with gluts of money at the end and middle of the months. They are obligated by their prospectuses to be fully invested and thus they start buying. How does that affect the market? It sends prices up of course. Can we make money on this? Let's look at the data first.

The two time periods that we will look at are the 26th through the 10th of the month (period 2) and the 11th through the 25th (period 1). If you look at the 39-year period from 1962- 1974, you'll find that period 1 had an average annual return of 1.6%, while period 2 had an average annual return of 7%. Is this a statistical fluke? Well, we may be able to tell better by looking at 3 13-year periods during the same time frame. From 1962-1974, period 1 had a -5% return while period 2 had a 5.7% return. That's a difference of over 10%. Is that coincidence? Probably not. The next 13-year period (1975-1987) showed returns of 4.7% for period 1 and 6.9% for period 2. During the final years of 1988-2000, period 1 gained 1.6%, while period 2 gained 7.0%. Once again, period 2 (the 26th- 10th) had higher gains. A statistician would agree that the probability of this happening for 3 different 13-year periods is slim.

Bottom Line

As far as the average month goes, for period 1 it was a .14% gain while, period 2 managed a .58% gain. Interestingly, the more recent period of 1988-2000 showed renewed strength in this phenomenon. The bottom line is if you plan on trading in the short term 1-2 weeks and you can't decide on when to enter a call position or any bullish position, do it from the 26th to the 10th of the month all other things equal. Use every edge you can. That's what effective trading is all about, a compilation of actions that give you casino-like house edges which you can use to grind out profit. Be disciplined- and trade well.

Price Headley is the founder and chief analyst of BigTrends.com.