Last Updated on January 6, 2021 by Oddmund Groette
The first trading day of 2021 started with a “mini-crash”. The S&P 500 fell 1.36% and the Nasdaq fell 1.41%.
We have previously established the end of the month effect: stocks perform better at the end of the month and the first two trading days of the month. You can find the strategy among the other trading strategies we have written from 2012 until today:
How does the market perform when the month starts with a loss?
First, let’s check how the S&P 500 perform on any day when the market falls. The negative return has to be “significant”. Thus, we make a condition that the market must fall at least 1.25 times the average 100-day range of the high minus the low. The exit is when the close is higher than yesterday’s high. The code in Amibroker is like this:
Buy= Ref(C,-1)-C > (Ref(range,-1)*1.25) ;
Since SPY’s inception in 1993, this has resulted in 288 trades, a CAGR of 5.5%, a max drawdown of 23.75%, an average gain of 0.55% per trade, and a profit factor of 1.71. Not an outstanding result as the strategy performed poorly in 2018 with a 17% loss.
This is the equity curve:
How does it perform when the first day of the month starts with a sell-off?
Let’s change the strategy to only trade when today is the first day of the month:
Buy= Ref(C,-1)-C > (Ref(range,-1)*1.25) AND Month()!=Ref(Month(),-1);
The strategy has 23 trades, a CAGR of 1.3% (exposure of only 1%), the average gain per trade is 1.6%, max drawdown is 4.1%, the win-ratio is 82.6%, and the profit factor is 11.97.
The equity curve looks like this:
How does it perform with the QQQ? Even better.
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.