End of Month Strategy in S&P 500

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A well known “fact” is the rally into the end of the month and the first day of every month. It’s a lot about it on the web, but as far as I can see no actual hard numbers and strategies. Therefore, some days back I posted a strategy showing the daily averages in S&P 500 based on which date of the month. And the results were quite clear: the best days tend to cluster around the end and beginning of each month. Is it possible to make a strategy out of this in the ETF SPY?

Here is one idea: buy on the 29th, 30th or 31st if S&P 500 ends down more than -.2% for the day. Why 0.2%? That number is randomly picked. I just want to buy on a down day, not an up day. The position is closed on the first up day (at the close). I looked at data from 1st of January 2005 until yesterday. Entry is on the close. A very simple strategy, but it turns out it’s quite effective (without considering commissions and slippage):

# Trades # Wins Avg. Profit % Max % Min % Total return %
47 36 0.54 4.14 -4.0 25.4

25.4% is quite good considering this is without leverage. This is 3.32% annual unleveraged return and with an average holding period of  2.77 days. That is average of 0.19% per day. Total number of days in the market is about 130 days.  93% of the time you’re in cash.

Let’s change the parameters and instead sell after two up days after entry:

# Trades # Wins Avg. Profit % Max % Min % Total return %
47 37 0.73 4.2 -8.67 34.3

 

Here is a chart showing accumulated return with just 50% position of capital, so the actual return is the double of the graph:

 

On average over the period the result is very good. However, both 2011 and 2012 are negative. Is the strategy about to be depleted? I have no idea. But most patterns disappear sooner or later.

I want to make a twist on the strategy. If we put in a target we might see more stable results. This is the result using 1% target:

# Trades # Wins Avg. Profit % Max % Min % Total return %
47 44 0.81 1.80 -3.37 38.1

The position is closed out at 1% gain compared to entry or when SPY rises two days in a row. 37 of the trades hit our target. Exit is done intraday when hitting target. Still, 4 trades have a bigger gain than 1% and that’s because SPY gaps up and opens higher than 1%. Then exit is done at the opening price.

And better, the equity curve gets a lot better:

 

I’ll end the discussion here, but as you can see there is a lot of opportunities playing the market at the end of month.