Last Updated on June 19, 2022 by Quantified Trading
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
Keep in mind 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:
100 000 invested in SPY (the ETF for S&P 500) in 1993 and being invested only during the last trading day of the month, has returned an average loss of 0.05% per trade. This has resulted in a negative annual CAGR of 0.7% CAGR.
Compare this to an average gain of 0.04% over the whole period, and you realize how bad this day has performed.
Clearly, 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:
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 very low at 41%. Thus we can’t blame any outliers: this seems to be a pretty bad day for stocks overall.
Why is the last trading day of the month bad?
We can only speculate. The most obvious reason we can think of is profit-taking. Because the last trading day has a very low win ratio, we suspect the edge could be structural – exactly the edge you are looking for.
We have had some ideas for this edge before, but never looked into it recently. If we find something we believe is durable, we might publish it as a monthly Trading Edge later.
If you would like to have the Amibroker code for the last day of the month trading strategy, you can buy that and in addition, get access the all the code for our free strategies:
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.