Tuesday, March 1, 2011

U.S. Market Has Not Fallen on First Day of the Month Since Last Summer

I noted a few quarters ago how the "first day of the month" was becoming strangely positive....it was not relatively known at the time and I was joking my 2nd fund would only be open 1 day a year - buying just before the end of close on the last day of previous month and going to all cash by end of day on the first.  The past 3-4 months I have seen notice of this 'situation' pop up all over the financial blogosphere.   Indeed it is now so obvious that even 'old media' has figured it out as we see in this morning's Wall Street Journal.   I will keep repeating these sort of comments but "in the old days" when everyone knew something, it stopped working.  Something has changed the past few years, where 'obvious' things now self fulfill much often, despite everyone (and their mother) knowing... not sure exactly why that is.

Bespoke blog has a chart of the past 14 "first day of the months" and as you can see there are only 2 losing sessions.  Ironically (grassy knoll alert) those happened when QE1 was over and QE2 had not begun.  I don't recall when QE1.5 happened exactly (rolling over of funds from expiring MBS into Treasuries) but I think maybe Julyish.  Whatever the case or reason, it is what it is....

Even cooler, Bespoke made a chart of returns during this 14 month period showing how it really does not bother to be in the market the rest of the month, especially if you understand risk adjusted returns versus just plain old returns.  You have a winning percentage (how often the first day of the month leads to gains) in excess of 80% and can capture in those few days almost the entire gain of the S&P 500.  That's risk adjusted nirvana.

[click to enlarge]

Again, until blue in the face, this is so obvious it should no longer work... but it continues to.


Some snippets from the WSJ piece
  • It is the latest twist on an old adage: Trade the first day, and stay away.  Some traders have been adopting a new ritual in recent months—buying early on the first day of the month and selling by the day's close—taking advantage of a peculiar phenomenon that has seen the Dow Jones Industrial Average rise substantially on the first day of each month. That one-day move often has accounted for much of the Dow's gains for the entire month.
  • Ed Yardeni, president of Yardeni Research, an economic-consulting firm, is recommending a new trading strategy: "Work during the first trading day of the month, and take the rest of the month off."
  • Just why the trend has been so consistent is a mystery. But market watchers like Mr. Yardeni point to the release of nationwide manufacturing data that usually hits on the first day of the month. The manufacturing sector has been one consistent source of positive surprises during the economic recovery.  Others suggest that the first day of the month is when money comes out of paychecks and into 401(k)s, ready to be plowed into the market.  Some also point to window-dressing by investors whose performance is measured monthly. These investors often sell toward the end of the month to lock in any gains, only to jump back in at the beginning of the fresh month.

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