Here's some research that should get your attention. Assume two $1,000 portfolios — which we'll call the Green and the Red — were started in January 1927. Although the market is open, on average, about 21 days each month, the Green portfolio was invested in stocks only during a certain "favorable period" of seven days that recurs each month. Then the stocks would be sold and the Green portfolio would be invested in Treasury bills until the next favorable period rolled around.

The Red portfolio, on the other hand, was invested in the opposite fashion, owning stocks only during the 14 or so other days each month, the days when the Green portfolio was sitting on the sidelines. Think of this as an "unfavorable period."

Neither Green nor Red added to their original $1,000, and they continued their crazy competition down through the decades until 1990 (which is as far as the original research went) when they totaled up their gains from 64 years of investing.

The Green portfolio, which was invested only one-third of the time, grew to a staggering $4,400,000! And the Red portfolio, which was invested twice as many days each month as the Green, saw its original $1,000 shrink to a meager $433! (Commissions and taxes have been omitted to dramatize the point.) Pretty amazing, huh?

The existence of a monthly favorable period and its use as a timing tool was first popularized in the 1970s in a book called Stock Market Logic, by Norman Fosback. He called it "seasonality," and defined it as (here's the part you've been waiting for) the last two trading days and first five trading days of each month.

In 1990, the scholarly Journal of Finance published a paper by Joseph P. Ogden of State University of New York. He offered an explanation of why this monthly seasonality might take place.

Professor Ogden's research discovered that 45% of all common stock dividends, 65% of all preferred stock dividends, 70% of interest and principal payments on corporate bonds, and 90% of the interest and payments on municipal bonds, is paid to investors on the first or last business day of each month. All this is in addition to the month-end contributions into 401(k) and other retirement savings accounts. Dr. Ogden concluded that this "regularity of payments" was responsible for the seasonality phenomena.

Subsequent research, however, has shown that neither the stock market's trading volume nor net mutual fund cash flows increase during the turn of the month period, which seems to refute Ogden's hypothesis. Still, the effect has continued to persist, not only in the U.S. market but also across multiple countries (30 of 34) studied (see the 2006 article, "Equity Returns at the Turn of the Month," by Wei Xu and John J. McConnell—PDF).

Yale Hirsch, publisher of the Stock Trader's Almanac, believes the growing awareness among investors of the monthly favorable period caused it to change, beginning in the mid-1980s. As more investors tried to get in ahead of this monthly rally, it had the effect of causing the rally to begin sooner. Hirsch says the pattern has been altered so that the new seasonality shifted to the last three trading days of any month and the first two of the next month.

Thankfully, for the investor using a monthly dollar-cost-averaging strategy, it doesn't matter which interpretation of the theory is precisely correct. (Dollar-cost-averaging is the practice of investing the same amount of money at regular time intervals, usually monthly.)