France is the seventh largest country in the world by GDP, making it one of the most important stock markets in the world. They have some of the biggest companies in the world, such as Louis Vuitton, Hermes, Dior, and Sanofi. However, we are traders, not investors, so let’s look at some trading strategies for French stocks.
However, the French stock market hasn’t performed well since 2001. Given the lack of outstanding returns, we decided to seek other strategies to trade this market and found that seasonal trading strategies could hold significant potential.
In this article, we will look at how the French stock market is composed and backtest a series of seasonal trading strategies.
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How is the French stock market composed?
The most popular stock index for the french market is the CAC 40. It was created in December 1987. It tracks the 40 largest French stocks based on the Euronext Paris market capitalization.
Some of its components include L’Oreal, Renault, Airbus and Michelin, and the companies mentioned in the introduction. Here is how the index has performed since its inception:
The returns haven’t been mind-blowing, but compared to other European countries’ indexes like Spain and Italy, it has done pretty well.
However, we asked ourselves if this performance could be improved through seasonal trading strategies, and we decided to start by determining the best day for French stocks.
What is the best day of the week for French stocks?
An interesting idea to backtest is to see which days French stocks perform the best.
In other words, how would a strategy that only holds French stocks on Mondays perform? And how about Tuesdays? And so on.
We used the ETF EWQ (iShares MSCI France) with the data adjusted for dividends. Here is the equity curve:
The results are pretty fascinating. Tuesdays and Wednesdays are the best-performing days, while Mondays are the worst. Interestingly, we found a similar pattern in Italian stocks.
Does the End-of-quarter seasonal trading strategy work in French stocks?
Another seasonal trading strategy is the end-of-quarter strategy.
The end of a quarter is generally regarded as a very important time for investors because it’s typically when most fund managers and hedge funds rebalance their portfolios, which can generate higher than usual volume and volatility.
The end-of-quarter trading strategy tries to capitalize on these times by holding stocks the last few days of the quarter.
The trading strategy we are going to backtest is pretty simple:
- At the close on the sixth last trading day of the quarter, we go long EWQ (hence, we are long the last five trading days of the quarter).
- At the close of the month, we exit and sell our position.
Here is the equity curve:
As you can see, the returns are not impressive. The strategy is invested 8.06% of the time and generated a CAGR of 1.97%. The risk-adjusted return is 24.4%(CAGR divided by time invested in the market), which is not bad.
Does the turn of the month trading strategy work in French stocks?
Lastly, we will backtest another popular seasonal strategy called the turn of the month.
The idea is similar to the end-of-quarter strategy: at the close of the fifth last trading day of the month, we buy EWQ. We hold it for seven trading days. Thus, we sell on the third trading day of the new month. Here is the equity curve:
The returns are impressive! The CAGR of the strategy is 9.72% vs. 7% for buy hold, while the system is only invested ⅓ of the time. Without a doubt, this has the best returns of the strategies backtested today, even though the strategy has gone more or less sideways for a decade since the equity peak in 2012.
Seasonal trading strategy for French stocks – conclusion
To sum up, today we saw how the French stock market is composed and backtested seasonal trading strategies using the French ETF EWQ. We found that the end-of-month trading strategy works very well and might be implemented in a trading plan.