Back in 2009, just as the spring was giving way to summer, I did a Google search for two terms.
The first term was “summer rally”. As you might imagine, with the market only a few months away from what would become the bear market lows of the 2007-2009 bear market, I received almost zero hits for the search “summer rally.”
By contrast, when I searched for “retest the lows,” there were links and hit’s a plenty.
As you may recall, the S&P 500 opened on June 1, 2009 at 923 and closed on August 31, 2009 at 1020 for a “summer rally” gain of more than 10%.
Food for thought, as we enter the final trading week of June.
In his book, Short Term Trading Strategies That Work, Larry Connors and Cesar Alvarez revealed research that showed that markets have a tendency to behave in certain ways at certain times of the month.
As Larry and Cesar wrote:
“You may be aware of the ‘end-of-the-month’ concept whereby money managers supposedly pile into the stocks at the end of the month in anticipation of 401(k) and retirement savings money coming in. Well, we decided to take a look at whether there was any statistical evidence to support this concept.”
To investigate the “end of the month” tendency, Larry and Cesar looked at stocks trading above the 200-day moving average between January 1995 and December 2007. After determining that the average five-day gain over the period was 0.25%, they compared that baseline to the actual test results for each day of the month.
What they found was fascinating. The days where the average gains were the most modest were almost exclusively in the first week of the month. By contrast, the days in which the gains were above baseline by several basis points were all in the latter part of the month.
Wrote Larry and Cesar:
“Look at what happens as we start approaching month’s end. The average gains rise significantly. On the 23rd day of the month, the average gain for these stocks nearly doubles. On the 24th, it more than triples. On the 25th, it nearly quadruples.”
This research was only the beginning of the investigation into how markets really work. The true goal was to take this information further, to a point where it could become actionable for short term traders looking to take advantage of these kinds of tendencies and patterns in the market. Applications of this research, for example, have found their way into the S&P 500 market timing strategies used by advanced traders in Larry Connors’ Chairman’s Club and the TradingMarkets Swing Trading College.
To learn more about the short term trading strategies like these, click here to find out how to get your copy of Short Term Trading Strategies That Work – now in paperback.
David Penn is Editor in Chief at TradingMarkets.com.