Invest On ‘Turn-of-the-Month’?

by Ed Elfenbein | November 2, 2010 2:28 pm

Invest On ‘Turn-of-the-Month’?

Since 1932, most of the S&P 500’s capital gain has come during a seven-day period at the turn of each month — specifically, the last four trading days and the first three trading days of each month. This represents about one-third of the total trading days. During the rest of the month, the stock market actually lost money.

Here are the numbers: Since the beginning of 1932, the S&P 500 has gained nearly 14,000% which is about 6.5% annualized. Investing in just the last four days and first three days of each month would have returned over 63,000% (not including trading costs). Annualized, that’s 8.6%. However, if you consider that it’s really only 32% of the time, the true annualized rate is over 28%.

The rest of the month — the other 68% of the time — has resulted in a combined loss of close to 78%.

Let me add some important caveats. First, I’m not offering this as trading advice. I’m merely showing that the market has historically experienced outsized gains at the turn of each month. Remember that trading in and out of the market is costly and these results don’t include taxes or commissions.

Secondly, this only refers to capital gains not dividends. A very large part of the market’s total return is due to dividends, and if you’re only invested one-third of the time, you’re going to lose out.

Having said that, here’s a graph showing what turn-of-the-month investing looks like. The S&P 500 is the red line. The blue line is performance during the seven-day period and the rest of the month is the black line.

image902 Invest On 'Turn of the Month'?[1]

Here’s a look at the average daily gains.

Day Daily Gain Stand Dev
Fourth to Last 0.068% 1.064%
Third to Last 0.021% 1.055%
Second to Last 0.071% 1.037%
Last 0.088% 0.997%
First 0.118% 1.117%
Second 0.168% 1.065%
Third 0.155% 1.077%

Why has the market shown this performance? It’s hard to say. One idea is that we’re seeing a pattern that’s simply the result of random behavior. If you splice and dice any data long enough, you’re bound to find some anomaly.

My hunch, however, is that there’s something to the turn-of-the-month effect. Perhaps it’s new money coming in or maybe positive business news is more likely to be announced.

Still, as powerful as the historical data is, I think the effect is too transient to base any investment strategy on.

As of this writing, Ed Elfenbein did not own a position in any of the stocks named here. Ed is editor of Crossing Wall Street, a Web site about stocks and the market designed to help individual investors. Check out his free Buy List[2] of stock recommendations.

Endnotes:
  1. [Image]: http://www.crossingwallstreet.com/image902.png
  2. Buy List: http://www.crossingwallstreet.com/buylist.html

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