Last Updated on June 19, 2022 by Quantified Trading
Our backtests suggest that NIFTY 50 has a positive end of month effect. A variation of the inputs does not change the result dramatically, thus the end of month effect seems reasonably robust.
The end of month effect is well documented in the US stock market, sometimes referred to as the turn of the month effect. In a previous article, we documented how you can turn this into a turn of the month trading strategy.
This article backtests to see if we can find the same end of month effect in NIFTY 50. The NIFTY 50 is the main Indian index and consists of the 50 largest Indian companies.
(Admittedly, we have never traded Indian stocks or indices. We would like to, but meet regulatory restrictions, at least a couple of years back when we tried.)
Let’s backtest the end of month effect in NIFTY 50
We use data from Yahoo!finance. Unfortunately, the dataset starts in 2007, and thus our time frame is (perhaps) too short. Anyway, it gives an indication.
The turn of the month trading strategy we used to backtest US stocks had an exit at the close of the third trading day of the month. For this article, we did optimization of the exit and it turns out NIFTY 50 has the optimal exit at the close of the second trading day of the new month.
We emphasize that we in this article use trading days – not calendar days. They can be completely different.
But what is the best trading day to enter? Let’s make an optimization where we enter on the tenth last trading day and we continue entering up until the last trading day of the month (we exit at the close on the second trading day of the new month):
The first column shows that an entry on the fifth and sixth last trading days of the month are the best in terms of profit factor, but not in terms of average gains (as expected it pays off to hold a bit longer). However, the gains don’t vary so much, and thus we go for the best profit factor.
Let’s formulate a turn of the month trading strategy for the NIFTY 50:
- We go long at the close of the fifth last trading day of the month.
- We sell at the close of the second trading day of the new month.
Let’s see how this performs if we invest 100 000 at the start and compound this amount until today:
The CAGR is 10.5% which is better than buy and hold even though we are only exposed to the market 30% of the time. Max drawdown is 26%.
Is this backtest curve fitted? Yes, to a certain degree it is.
However, by changing both the entry and exit just a few days we see that the result is reasonably robust. The profitability changes a little, but overall, we see a nice tailwind whenever we enter during the last ten days of the month.
All in all, we would say that NIFTY 50 has a positive end of the month effect. This can hence be used as a turn of the month trading strategy.