The Turn Of The Month Trading Strategy (End Of Month Effect)

Last Updated on August 30, 2021 by Oddmund Groette

The end-of-month effect is a well-known trading strategy in the stock market. We have covered this anomaly before. To get you started on what this strategy is all about we recommend reading a previous article:

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 effect or strategy.

In this article, we test the turn of the month effect and backtest the performance for a wide range of markets. 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. 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.

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.

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
  • Retail 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:

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. We enter at the close on the fifth last trading of the month, and we exit at the close on the third trading day of the new month.

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).

  • CAGR: 7.2%
  • Buy and hold CAGR: 7.1%
  • Drawdown: -27%
  • Buy and hold drawdown: -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.

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 FEMKX, Fidelity’s emerging markets fund.

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

  • CAGR: 11.52%
  • Buy and hold CAGR: 6.2%
  • Drawdown: -34%
  • Buy and hold drawdown: -72%

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

We test by using Fidelity’s healthcare fund which has the ticker code HCPIX.

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

  • CAGR: 10.1%
  • Buy and hold CAGR: 7.9%
  • Drawdown: -33%
  • Buy and hold drawdown: -65%

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

We use Fidelity’s FSRPX to test. This is what we got:

  • CAGR: 12.2%
  • Buy and hold CAGR: 9.6%
  • Drawdown: -31%
  • Buy and hold drawdown: -70%

The turn of the month/end of month seasonality in

gold mining stocks

Again, we use one of Fidelity’s funds: the ticker code is FSAGX. Gold mining stocks have been a poor long-term investment but the turn of the month has been reasonably consistent for over three decades:

  • CAGR: 7%
  • Buy and hold CAGR: 3.75%
  • Drawdown: -54%
  • Buy and hold drawdown: -79%

We have previously written about gold vs. gold stocks:

The turn of the month/end of month seasonality in

high yield funds

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

  • CAGR: 8.8%
  • Buy and hold: 7.4%
  • Drawdown: -8%
  • Buy and hold drawdown: -31%

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: 10.9%
  • Buy and hold: 8.8%
  • Drawdown: -22%
  • Buy and hold drawdown: -74%

The turn of the month/end of month seasonality in

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: 2.85%
  • Buy and hold: 8.3%
  • Drawdown: -33%
  • Buy and hold drawdown: -45%

The turn of the month/end of month seasonality in

long-term Treasury bonds

What about long-term Treasury bonds? Not surprising, the end of month effect seems non-existing in TLT, quite the opposite:

  • CAGR: 0.3%
  • Buy and hold: 6.5%
  • Drawdown: -23%
  • Buy and hold drawdown: -26%

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 FDFAX, Fidelity’s consumer staples fund:

  • CAGR: 8.5%
  • Buy and hold: 7.6%
  • Drawdown: -21%
  • Buy and hold drawdown: -41%

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: 19.7%
  • Buy and hold: 6.2%
  • Drawdown: -43%
  • Buy and hold drawdown: -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: 6%
  • Buy and hold: 1.7%
  • Drawdown: -25%
  • Buy and hold drawdown: -59%

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: 51.3%
  • Buy and hold: 94.2%
  • Drawdown: -38%
  • Buy and hold drawdown: -83%

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: 5%
  • Buy and hold: -1.8%
  • Drawdown: -28%
  • Buy and hold drawdown: -76%

The turn of the month/end of month seasonality in

utilities FUGAX

Even in the boring utility sector, we see strong gains at the end and beginning of each month. We tested by using Fidelity’s FUGAX:

  • CAGR: 7.6%
  • Buy and hold: 6.7%
  • Drawdown: -24%
  • Buy and hold drawdown: -71%

The turn of the month/end of month seasonality in

technology stocks FADTX

However, in tech stocks, it seems the effect is more erratic compared to the S&P 500. We tested by using Fidelity’s FADTX:

  • CAGR: 8.6%
  • Buy and hold: 9.5%
  • Drawdown: -51%
  • Buy and hold drawdown: -83%

The turn of the month/end of month seasonality in

energy stocks FANAX

In energy stocks, which have been poor performers over the last three decades, we see a strong effect at the end and beginning of each month. Fidelity’s FANAX shows abnormal returns by using our simple strategy:

  • CAGR: 9.9%
  • Buy and hold: 2.2%
  • Drawdown: -39%
  • Buy and hold drawdown: -82%

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 (^NFTY).

  • CAGR: 9.7%
  • Buy and hold: 9.5%
  • Drawdown: -34%
  • Buy and hold drawdown: -60%

Is the turn of the month anomaly 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, this is likely to continue. 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.

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 (60+), please click here:

Disclosure: We are not financial advisors. Please do your own due diligence and investment research or consult a financial professional. All articles are our opinions – they are not suggestions to buy or sell any securities.