The Turn Of The Month Trading Strategy (Ultimo Effect)

The end-of-month effect (also called the Ultimo Effect) is a well-known trading strategy in the stock market. We have covered this anomaly before. Perhaps what is lesser known is that the effect spills over to the first three days of the next month. Thus, a more correct name might be the turn of the month strategy (or turn of the month effect).

The turn of the month strategy performs very well in most markets and frequently beats the buy and hold strategy despite its low exposure time. We go long at the close on the fifth last trading day of the month, and we exit after seven days, ie. at the close of the third trading day of the next month.

Thus, the strategy is invested around 33% of the time. If you want just one monthly trading strategy, then the turn of the month effect might be the strategy for you. The conclusion of the month has a strong positive bias!

Related reading:–Consistent and profitable free trading strategies (hundreds)

In this article, we test the turn of the month effect and backtest the performance for a wide range of markets, and we provide you with Python code at the end of the article.

Turn of the month meaning

First, let’s define turn of the month meaning: this means the last trading days of the month and the first trading days of the new month. You buy a few days before closing out the month and sell a few days into the new month.

When do you buy and sell? This website is all about statistically proven trading strategies, so keep reading and you’ll find out when the end of month rally starts when we start backtesting:

Why is there a turn of the month effect?

Most likely the effect is caused by some structural forces like for example increased inflow of capital from savers or rebalancing from the fund management business. We don’t know for sure, and perhaps it doesn’t really matter why it exists.

Turn of the month strategy video

If you missed the video at the top of this article, then please click here to open it in another tab.

We test these markets for the turn of the month effect:

We look at the following sectors and markets:

• The S&P 500
• Emerging markets
• Healthcare stocks
• Gold mining stocks
• High yield funds
• Real estate stocks
• The gold price
• Long term Treasury bonds
• Consumer staples
• Brazilian stocks
• Japanese stocks
• Bitcoin
• Commodities
• Utilities
• Energy stocks
• Nifty Fifty (Indian market)

How we backtest the turn of the month strategy: trading rules

In some of the backtests we use the fund quotes from Fidelity funds. That’s because they contain data extending further back than most ETFs. This doesn’t mean we recommend the fund or Fidelity.

As a matter of fact, the Fidelity funds might be completely useless for trading because of, for example, fees and redemption time. Please think of them as proxies for other more tradeable instruments. At the end of the day, you need to your own due diligence.

The backtests start with 100 000 and the results are compounded.

In this article, we use the following trading rules to backtest the turn of the month trading strategy:

Trading Rules

THIS SECTION IS FOR MEMBERS ONLY. _________________ BECOME A MEBER TO GET ACCESS TO TRADING RULES IN ALL ARTICLES CLICK HERE TO SEE ALL 400 ARTICLES WITH BACKTESTS & TRADING RULES

The end of month/turn of the month seasonality in the S&P 500

The turn of the month strategy has worked very well for the S&P 500 since at least 1960:

As you can see, the turn of the month seasonality in the stock market has existed for 60 years!

If you were only invested during the last four and first three trading days of the month, you would have beaten buy and hold with significantly lower drawdowns (not adjusted for dividend reinvestments). The drawdowns since 1960 look like this:

The drawdowns are both smaller and last shorter than buy and hold. Let’s summarize:

• CAGR/annual return: 7.11% (buy and hold cash index: 6.95%)
• Max drawdown: 27% (buy and hold (56%)

Let’s flip it and check how the performance has been if we were only invested all the other days, ie. we buy on the close on the third trading day of the month and we sell at the close on the fifth last trading day of the month:

Not so good!

Can we expect the effect to work in other asset classes and stock markets? The S&P 500 is the “engine” that determines the short-term movement in markets worldwide and we can most likely expect many more markets and sectors to perform pretty similarly to the S&P 500.

Improved trading strategy

We have improved the turn of the month strategy for S&P 500 and we sell it as a stand alone strategy. Please read more here:

• Turn of the month strategy improved

Let’s test some random markets and industries:

The turn of the month/end of month seasonality in emerging markets

To test, we use the ETF with the ticker code EEM.

This is how emerging stocks performed by being invested only during the turn of the month:

• CAGR/annual return: 13.6% (buy and hold EEM dividends reinvested: 8.1%)
• Max drawdown: 28% (buy and hold (66%)

The turn of the month/end of month seasonality in healthcare stocks

We test by using the ticker code XLV.

This is how healthcare stocks performed by being invested only during the turn of the month:

• CAGR/annual return: 6.5% (buy and hold XLV dividends reinvested: 8.2%)
• Max drawdown: 14% (buy and hold (39%)

The turn of the month/end of month seasonality in gold mining stocks

We use the ticker code GDX. Gold mining stocks have been a poor long-term investment, but the turn of the month has been much better for over three decades:

• CAGR/annual return: 2.8% (buy and hold GDX dividends reinvested: -17.4%)
• Max drawdown: 59% (buy and hold (80%)

The turn of the month/end of month seasonality in high yield funds

The ticker code for the test is HYG and shows a pretty significant edge by being invested only during the turn of the month:

• CAGR/annual return: 4.8% (buy and hold HYG dividends reinvested: 4.3%)
• Max drawdown: 14% (buy and hold (34%)

The turn of the month/end of month seasonality in real estate stocks

The equity chart below is derived by using the ticker code IYR. As we can see, the end of the month effect has beaten the buy and hold over the last twenty years:

• CAGR/annual return: 9.6% (buy and hold VNQ dividends reinvested: 6.7%)
• Max drawdown: 23% (buy and hold (73%)

The turn of the month/end of month seasonality in the gold price

Is there any end of month seasonality in the gold price? Because the gold price is “detached” from the stock market, the effect is low to non-existing. Below is our backtest on GLD:

• CAGR/annual return: 2.2% (buy and hold GLD dividends reinvested: 7.6%)
• Max drawdown: 32% (buy and hold (45%)

The turn of the month/end of month seasonality in long-term Treasury bonds

We have covered the turn of the month for TLT in a separate article: end of month effect in Treasuries.

The turn of the month/end of month seasonality in consumer staples

Consumer staples are good trading stocks which we frequently make strategies in for our subscribers to the monthly Trading Edges.

But how do the consumer staples perform during the last and first day of the month? We test by using XLP, the ETF that tracks consumer staples:

• CAGR/annual return: 4.2% (buy and hold XLP dividends reinvested: 6.3%)
• Max drawdown: 14% (buy and hold (35%)

The turn of the month/end of month seasonality in Brazilian stocks

Even in Brazil, the turn of the month seems to yield abnormal returns. The ticker code is EWZ:

• CAGR/annual return: 16.5% (buy and hold EWZ dividends reinvested: 5.9%)
• Max drawdown: 43% (buy and hold (77%)

The turn of the month/end of month seasonality in Japanese stocks

The Japanese stock market has not performed well after the bubble burst in 1989, but it turns out the turn of the month effect has beaten the buy and hold handily, here shown by the ticker EWJ:

• CAGR/annual return: 6.2% (buy and hold EWJ dividends reinvested: 1.7%)
• Max drawdown: 24% (buy and hold (58%)

The turn of the month/end of month seasonality in Bitcoin

Even in Bitcoin, we see a relatively stronger performance when we end the month and start a new month:

• CAGR/annual return: 40.8% (buy and hold BTC: 61.2%)
• Max drawdown: 38% (buy and hold (83%)

The strategy can be improved (for Bitcoin). Please see our separate article about end of month effect in Bitcoin.

The turn of the month/end of month seasonality in commodities

Commodities have performed poorly over the last decades, even on a much longer time frame. Perhaps they have performed better during the end of the month and the beginning of each month? It turns out commodities have performed well, but rather erratic. The below test is by using the ticker code DBC:

• CAGR/annual return: 4.1% (buy and hold DBC: 0.6%)
• Max drawdown: 28% (buy and hold (76%)

The turn of the month/end of month seasonality in utilities

Even in the boring utility sector, we see strong gains at the end and beginning of each month. We backtested by using XLU:

• CAGR/annual return: 6.1% (buy and hold XLU dividends reinvested: 6.4%)
• Max drawdown: 22% (buy and hold (52%)

The turn of the month/end of month seasonality in technology stocks

However, in tech stocks, it seems the effect is more erratic compared to the S&P 500. We backtested by using XLK:

• CAGR/annual return: 8.1% (buy and hold XLK dividends reinvested: 8.3%)
• Max drawdown: 43% (buy and hold (82%)

The turn of the month/end of month seasonality in energy stocks

In energy stocks, we see a strong effect at the end and beginning of each month. We backtest XLE:

• CAGR/annual return: 8.3% (buy and hold XLE dividends reinvested: 8.0%)
• Max drawdown: 28% (buy and hold (71%)

The turn of the month/end of month seasonality in the Indian Nifty Fifty

Let’s end the article by looking at the Indian market. The Indian market has, to our knowledge, the most listings in the world, but we test by using the main index, the Nifty Nifty (^NSEI).

• CAGR/annual return: 10.4% (buy and hold: 9.5%)
• Max drawdown: 34% (buy and hold (59%)

End of month trading strategy – trading the end of the month (monthly trading strategy)

Let’s look at the specific end of month trading strategy. To do this, we make an optimization where we look at the returns from 1-7th last trading days of the month. We exit at the close of the last trading day of the month:

The first column shows which day we enter (at the close), and the third column shows the average gain per trade. As you can see, the end of the month has been very positive since 1960 until today.

You can also see that the last trading day (not the end of the calendar month) is the worst of the seven last trading days. Thus, the month’s close is not a particularly good trading day, especially not in the last 30 years (not shown). Please also read our article about the last trading day of the month strategy.

Last day of the month

Let’s look at the performance of the last (calendar) day of the month (when the month’s end date is a trading day – something which is not always the case):

The last day of the month, day 31, has an average gain of 0.1%, which is way better than any random day (which is 0.04%). This means that the month’s last day (the last date of the month) is better than the last trading day of the month.

Amibroker code for turn of the month effect

The calendar day is not the same as trading day. For example, the final day of the month is not necessarily the 31st, and the first day of the month is not always the 1st calendar day. Thus, you need to code.

If you’d like to have the Amibroker backtesting code and logic for the turn of the month trading strategy, plus all the other free strategies (200+), please click here:

Is the turn of the month strategy likely to continue?

If this is a structural behavior of how the markets work, which we believe it is, at least to a certain degree, the turn of the month trading strategy is likely to work well in the future. After all, the turn of the month strategy has performed consistently in the S&P 500 for over 60 years, even before passive index funds saw the day of light.

The End of the Month Effect on Pinterest

Python code for Turn of The Month trading strategy

Below you find the complete Python code on how to enter before the end of the month. The code was originally for seasonal effects of long term Treasuries, but it’s relevant also for the Turn of the Month, albeit THE CODE IS NOT FOR THE TURN OF THE MONTH STRATEGY (we take no responsibility for the code).

The Python code was written by @DrDanobi on Twitter, and it was written for another strategy, but we believe the code is helpful and relevant for the turn-of-the-month trading strategy.

Here’s the Python code:

FAQ:

– What is the “Turn of the Month” trading strategy, and how does it differ from the end-of-month effect?

The “turn of the month” trading strategy focuses on the last trading days of the month and the first trading days of the new month. It extends the traditional end-of-month effect and aims to capitalize on specific market behavior during this period.

– How does the “Turn of the Month” strategy work, and when are the entry and exit points?

The strategy involves going long at the close on the fifth last trading day of the month and exiting at the close of the third trading day of the new month. This means buying a few days before the month ends and selling a few days into the new month.

– What is the historical performance of the “Turn of the Month” trading strategy in the S&P 500?

The strategy has performed remarkably well for the S&P 500 over the past 60 years. It boasts a Compounded Annual Growth Rate (CAGR) of 7.1% with significantly lower drawdowns compared to a buy-and-hold approach.

Is the Ultimo effect the same as the end-of-month effect?

Yes, the Ultimo effect is similar to the end-of-month effect. Both refer to a tendency for stock prices to rise towards the end of the month, often due to institutional buying, reinvestment of dividends, or monthly fund inflows. However, the Ultimo effect specifically emphasizes the last trading day or the very last few days of the month.