100+% Of The Market Gains Trading Only 6 Days A Month? It Looks Like It’s True…
100+% of the Market Gains
Trading Only 6 Days a Month? It Looks Like It’s True…
One of the things we are constantly striving to
do at TradingMarkets is publish original market research, especially research
which has been quantified. This week I’m going to share some new research with
you which will hopefully improve your trading even further.
The Pheonomenon
One of the things many of us have heard over the years is that the last few days
of the month and the first few trading days of the new month tend to have
bullish tendencies. I first heard of this when Kevin Haggerty wrote about it
here on the TradingMarkets site about six years ago. Kevin, as you know, was the
head of trading for Fidelity Capital Markets for a number of years, so he has
had the chance to observe this market behavior better than most of us. Since
Kevin first mentioned it, I’ve observed the behavior enough times over the years
to prompt me to research it further and to quantify it. The results from
our research are very interesting and may provide you with some edges you can
take advantage of in the future.
The Question
We asked the following question in our tests: How has the S&P 500
(
$SPX.X |
Quote |
Chart |
News |
PowerRating),
Nasdaq 100
(
$NDX.X |
Quote |
Chart |
News |
PowerRating) and Semiconductor Index
(
$SOX |
Quote |
Chart |
News |
PowerRating) done if one had
purchased these markets (on the opening) a few trading days before the month
ended and exited a few days into the month? We looked at buying 1-5 trading days
before month’s end as the entry and exiting 1-5 trading days into the new month
(slippage and commission are not included. Past results are not indicative of
future returns. All results were created from simulated trading).
The Results
What we found was eye-opening. Most combinations did well. The sweet spot in the
combinations was the one model which had you entering on the open the day before
the last trading day of the month and exiting on the open on the fifth trading
day of the month (you would be in the market a total of six trading days). How
well did this do? Here are some results:
The SPX gained 753 points from January 1995 through the end of 2004 (10 years).
But, had you purchased the SPX the day before the last trading day of the
month, and exited on the opening of the fifth trading day of the month (and you
stayed out of the market the rest of the month), the gains were 820 points.
That’s right. Those six trading days, on a net basis, led to all the market
gains. The remaining 14-16 trading days of the month led nowhere. Sixty-four
percent of the trades were successful.
Nasdaq 100
What about the Nasdaq? The gains hold here, too. The Nasdaq 100 has gained 1217
points over the past 10 years. But, buying and selling only over the six-day
period showed gains of 1354 points.
Semiconductors
Now let’s look at the SOX (Semiconductor Index). Are you ready to have your eyes
opened? The SOX gained 293 points over the past 10 years. Yet, buying and
exiting during the end of the month/beginning of the month period gained 1080
points. It outperformed the SOX by more than three times, while being in
the market only 28% of the time!
200-Day Moving Average
Let’s go further. You know from
How Markets Really Work that over the past 15 years markets have
performed better on the long side above their 200 day moving average and worse
below their 200 day MA. So let’s add the 200-day moving average to this. Let’s
only buy on the opening the day before the last trading day of the month and
exit on the open on the fifth trading day of the month. And we’ll only take this
trade if the index is above its 200-day simple moving average. When we do this,
our market exposure is now lowered to only 19%. Yet, the gains in the SPX
basically replicate the total points gained while being in the market 100% of
the time (753 points vs. 743 points). For the Nasdaq, the gains jump up to
1768 points versus 1217 for buy and hold. And for the SOX, the gains are 952
points versus 293 for buy and hold. The SOX gains are even more impressive
because you were only in the market 14% of the time.
SOX Equity Chart
Here is an equity chart of the SOX trading it
only six days a month while it’s above its 200-day moving average. As you can
see, a hypothetical $100,000 account has grown to better than $550,000
with a compounded annual rate of return of nearly 20%. You were only in the
market 14% of the time over the past decade.
TradingMarkets Swing Trading College
If you enjoy this type of research and are looking to trade systematically using
methodologies which have been statistically quantified, please check out our new
TradingMarkets Swing Trading College. Over a 14-week period of time, you
will be trained to be a systematic swing trader using strategies, systems and
methods that have never before been published. As strong as the above trading
model is, the trading models in the College are as strong, and most are even
stronger. And the Swing Trading College is being taught by Steve
Primo. Steve was a 9-year Specialist for Donaldson, Lufkin and Jenrette (DLJ)
and now runs a model-driven systematic private investment partnership.
If you would like information on the
TradingMarkets Swing Trading College, you can find it
here.
Summary and Conclusion
Obviously, it appears the end of the month/early month trading bias is real. Why
is this so? It’s likely that money managers see the greatest inflows of cash
during that period of time and they are aggressively putting this money to work.
There are many, many ways to take advantage of this information, and in later
weeks I’ll be spending some time sharing these ways with you..
Have a great week trading (and go Pats)!
Larry Connors