A well-known “fact” is the end-of-month rally in stocks at the end of the month and the first day(s) of the next month. It’s a lot about it on the web, but as far as I can see no actual hard numbers and strategies. Do stocks go up at the end of the month? Let’s do some backtests.
There is a significant end-of-month rally in stocks. Our end-of-month trading strategy in the S&P 500 shows abnormal returns compared to other days of the month.
The effect is often referred to as the turn of the month effect.
In a previous article we backtested the performance of the S&P 500 for each calendar day of the month:
The best days tend to cluster around the end and the beginning of each month.
Is it possible to make a profitable trading strategy in stocks at the end of month effect?
The end of month rally/effect in the S&P 500 (SPY)
Let’s make a backtest to verify or falsify the end of month effect. We test by using free data from Yahoo!finance and use the ticker ^gspc. This ticker is the cash price of the S&P 500 index and doesn’t include reinvested dividends.
Our end of month stock trading strategy:
At the close of the fifth last trading day of the month, we buy the S&P 500. We hold the S&P 500 for seven trading days. Thus, we sell on the third trading day of the new month. In other words, we own the S&P 500 approximately 1/3 of a month’s trading days.
You can trade this strategy either by buying the ETF with the ticker code SPY, or you can buy S&P 500 futures contracts (the original contract, the e-mini, or the e-micro).
The equity curve from 1960 until the spring of 2021 looks like this (compounded – starting with 100 000 in 1960):
CAGR is 7.2% (buy and hold is 7.1), time spent in the market is 33%, the win ratio is 62%, the average winner is 2.1, the average loser is 1.84%, the profit factor is 2, and the max drawdown is 27%.
Just by being invested in the stock market 33% of the time you get the same return as buy and hold with just half the drawdown! Of the 61 years since the start of the strategy, we have had just 8 losing years, the worst being 2002 with a 15% loss. Just three years had losses of more than 10%.
Get the code for this strategy plus 60+ other free strategies:
Conclusion: the end of month effect is strong
Even though slippage and commissions are not included, we think the numbers are outstanding for such a simple trading idea.
The end of month effect is low-hanging fruit in the stock market.
