The Only 5 Trading Days That Matter

In 2004, we published on the TradingMarkets website test results showing the that the majority of the gains each month were coming from the last 5 days of trading for the month. We then went further and published the updated results in our book “Short-Term Trading Strategies That Work”.

This “end-of-the-month” phenomena was first brought to my attention by Kevin Haggerty in the 1990’s. At the time, Kevin was the Head of Trading for Fidelity Capital Markets and still to this day rates as one of the smartest traders I know. Kevin pointed out to me back then that money managers would pile into stocks at the end of the month for a multitude of reasons including anticipating cash coming in from monthly contributions people made to their retirement’s plans held by the mutual funds.

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Once he pointed it out to me I saw this behavior over and over again each month, especially during the bull market years.

In 2004 we decided to run test results around it and just as Kevin stated, we statistically saw the phenomena was real.

Over the next few years this behavior became widely accepted on Wall Street and of course once something becomes widely accepted on Wall Street, it tends to stop working. And that’s what happened for a couple of years in 2009 and 2010. But in 2011 and up through this year (through July), the end-of-the month phenomena has returned and is again in full force.

For the first 7 months of 2012, simply buying the S&P (via SPY) on the fifth trading day before the end of the month and selling it on the close on the last trading day of the month gave you approximately 100% of this year’s gains. Yes, that’s right, 35 days of work have provided 100% of the gains.

In 2011 it was even better. The year ended relatively quiet for the S&P. But not the last five trading days. When the S&P was above the 200-day moving average (an uptrend) those last 5 day’s of the month accounted for returns of over 11% versus a small loss for the S&P. Someone working only 60 days in 2011 outperformed over 98% of the fund managers in the United Stated by applying this strategy!

There are some caveats to this.

1. What’s happened in the past doesn’t mean it will happen in the future.

2. This is not bullet-proof. It stopped working for a few years before it started working again the past 1 ½ years. Would it be something I’d put all my money into? Not a chance. Is this something that I’m aware of and would take into account with my trading? Yes. When a trader of Kevin Haggerty’s stature see’s it in the 90’s and it’s then tested and proven in 2004, and it’s still occurring years later, it needs to be factored into trading decision.

The” End-of the Month Phenomena” is alive and well. We’ll see if it continues in the future but for now, it’s working just as it’s worked for the past two decades.

PS – I’m happy to announce that we will be holding our 1st Quantified Options Trading Strategies Summit on August 25. As far as we know, this is the first time a quantified options trading event has ever been held. If you’re interested in learning more about the 1st Quantified Options Trading Strategies Summit, please click here.