An increasingly popular article of faith in the financial media is that the days just before a quarter’s end tend to be characterized by trading anomalies in the stock market. This comes up quite a bit on CNBC, and it was mentioned in Barron’s just before 2012’s first quarter ended.
However, a look at the numbers shows that the real action comes just after quarters are over.
Looking back to the start of the 2000s, a period that encompasses 48 calendar quarters, the final five sessions of quarters, on average, bring almost no discernible divergence from normal market patterns. The average return for the S&P 500 Index was just barely positive at 0.12%, with 26 quarters bringing positive returns and 22 resulting in a loss.
Also, it’s not possible to infer anything about the likely direction of the market in the final five sessions of the quarter based on how the market had performed quarter to-date. In fact, it’s essentially a coin flip: 24 times the S&P maintained the quarter’s prior trend in the last five sessions, and 24 times it experienced a counter-trend move.
The takeaway: There’s no meaningful benefit in trying to take advantage of calendar trends at quarter’s end, at least with respect to the broader market.
On the other hand, the five sessions just after the quarter begins provide more opportunity. The average return for the S&P 500 in this interval is 0.31%, and it rises to 0.61%, if the -14.6% return that kicked off the third quarter in 2008 is removed from the equation. In addition, the market is positive 64.5% of the time in the first five sessions of calendar quarters, with 31 gains and 17 losses.
Part of this result is skewed by stocks’ tendency to register gains at the start of the new year, as the average market return in the opening five sessions of calendar years since 2000 is 0.52%. Nevertheless, the evidence shows that the first week of the quarter provides a nice tailwind for longs.
Two other trends that stood out:
- The S&P was more likely to maintain the direction of the previous quarter in the first five sessions of the new quarter than it was to reverse course: On 31 of 48 occasions, the trend of the prior quarter remained in place.
- The first five sessions indicate the direction of the remainder of the quarter approximately two-thirds of the time. Assuming the S&P finishes the current quarter in positive territory, the result of the first five sessions (up or down) was the same as the quarter’s final result 32 of 48 times since the turn of the millennium.
These results only demonstrate that investors need to take any media discussion of “quarter-end effects” with a grain of salt since the most meaningful anomaly occurs after the end of the quarter.
And even here, extreme caution is warranted. Volatility tends to be higher than normal at the start of the quarter, and the average return of the S&P 500 in the 17 times the market didn’t rise in the first five sessions was an ugly -2.80%.
The bottom line: Investors should employ a healthy skepticism when it comes to the conventional wisdom. Even the quarter trends that do seem apparent may help only modestly in the timing of trades.