Oddis71's  Instablog

A well known "fact" is the rally into the end of the month and the first day of every month. It's a lot about it on the web, but as far as I can see no actual hard numbers or strategies. Looking at the average return from close to close I calculated these returns in the ETF SPY from January 2005 until end of June 2012:

The first column is the day: 1 is the 1st of the month. For example, 13th is the 13th of January. "Close to close" is the average from the previous days close to todays close. For example, The 1st is the gain from the previous day until the close of the 1st. "Close to open" is the average gain from yesterdays close to todays open. "Open to close" is the average gain intraday from open to the close. The three columns called "average" is simply the average of the 5 days prior to the row.

And the results are quite clear: the best days tend to cluster around the end and beginning of each month. Is it possible to make a strategy out of this?

Here is one idea: buy on the 29th, 30th or 31st if SPY ends down more than -.2% for the day. Why 0.2%? That number is randomly picked. I just want to buy on a down day, not an up day. The position is closed on the first up day (at the close). I looked at data from 1st of January 2005 until end of June 2012. Entry is on the close. A very simple strategy, but it turns out it's quite effective (without considering commissions and slippage):

25.4% is quite good considering this is without leverage. This is 3.32% annual unleveraged return and with an average holding period of 2.77 days. That is average of 0.19% per day. Total number of days in the market is about 130 days. 93% of the time you're in cash.

Let's change the parameters and instead sell after two up days after entry:

Here is a chart showing accumulated return with just 50% position of capital, so the actual return is the double of the graph:

(click to enlarge)

On average over the period the result is very good. However, both 2011 and 2012 are negative. Is the strategy about to be depleted? I have no idea. But most patterns disappear sooner or later.

I want to make a twist on the strategy. If we put in a target we might see more stable results. This is the result using 1% target:

The position is closed out at 1% gain compared to entry or when SPY rises two days in a row. 37 of the trades hit our target. Exit is done intraday when hitting target. Still, 4 trades have a bigger gain than 1% and that's because SPY gaps up and opens higher than 1%. Then exit is done at the opening price.

And better, the equity curve gets a lot better:

I'll end the discussion here, but as you can see there is a lot of opportunities playing the market at the end of month.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.