Last Trading Day Of The Month Trading Strategy (Seasonality)
The last trading day of the month offers trading opportunities. This is one of many seasonal trading strategies. Can we make a last trading day of the month trading strategy?
The last trading day of the month is a weak day in the stock market – the last trading day of the month is a negative seasonality. We emphasize that this is the last trading day, not necessarily the last calendar day. As it turns out, the last trading day of the month is one of the worst days of the month.
Let’s start by measuring the average return on the last trading day of the month:
The last trading day of the month effect
Remember that we are looking at trading days – not calendar days. These two are often different when the last calendar day is either on a weekend or holiday.
If we invest at the close on the second last trading of the month and sell at the close of the last trading day (sell at the close of the month), we get this compounded return in the S&P 500 (SPY) from inception until today:
100 000 invested in SPY (the ETF for S&P 500) in 1993 and invested only during the last trading day of the month has returned an average loss of 0.06% per trade. This has resulted in a negative annual CAGR of 0.8% CAGR.
Compare this to an average daily gain of 0.04% over the whole period, and you realize how badly this day has performed.
No end-of-month effect on the last trading day of the month!
What happens if we exit on the open of the last trading day of the month (not the close)? This is the overnight result of buying the close of the second last trading day of the month and selling on the open next day:
The average gain is 0.04%. You might want to read more about Night strategies trading (overnight edges/strategies).
This means that the performance from the open to the close on the last trading day of the month is pretty miserable:
Day trading the last trading of the month
Let’s test the performance of owning the S&P 500 from the open to the close on the last trading of the month. As indicated above, this is a poor strategy.
100 000 invested in 1993 and compounded/reinvested until July 2021 yields this equity curve:
The average gain is a negative 0.11%! Not only does this strategy show left-tail tendencies, but the win ratio is meager at 42%. Thus, we can’t blame any outliers: this seems to have been a pretty bad day for stocks overall. You can read more about this in a separate article called What are negatively skewed trading strategies.
Why is the last trading day of the month bad?
We can only speculate. The most obvious reason is profit-taking. Because the last trading day had a low win ratio, we suspect the edge could be structural—precisely the edge you are looking for.
The last trading day of the month – for members
We have made a strategy out of the last trading day of the month. You can read more here: Last trading day of the month strategy (improved)
Conclusion about the last trading day of the month:
The last trading day of the month has generated negative returns, but this is because of the very poor intraday performance from the open to the close. From the close of the second last day until the next open, the return has been more or less the same as the average over the last 30 years.
FAQ:
– What is the significance of the last trading day of the month in the stock market?
The significance of the last trading day of the month in the stock market is that it’s a weak day for stocks with poor performance. This has led to the exploration of trading opportunities based on this particular day.
– Is there an end-of-month effect on the last trading day, and how does it compare to an average day in the market?
There is no end of month effect on the last trading day because it performs significantly worse than any random day.
– What happens if you exit on the open of the last trading day of the month, and how does it impact trading strategies?
If you exit on the open of the last trading day of the month, you yield a slightly better average gain than closing at the end of the day. This insight is valuable for crafting trading strategies and understanding overnight performance.