The End of Month Rally/Effect In Stocks (S&P 500 Trading Strategy)

Last Updated on June 19, 2022 by Quantified Trading

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.

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  • I got some replies on how this works on other ETFs. It works well. However, S&P is the leading indicator and if trading DAX, FTSE etc, you get about 75% of the fills on the same day. So might as well only trade S&P or one of the other.