What Happens After A Sell-Off On The First Day Of The Month?
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:
range=MA((H-L),100);
Buy= Ref(C,-1)-C > (Ref(range,-1)*1.25) ;
buyPrice=Close;
Sell= C>Ref(H,-1);
sellPrice=Close ;
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:
range=MA((H-L),100);
Buy= Ref(C,-1)-C > (Ref(range,-1)*1.25) AND Month()!=Ref(Month(),-1);
buyPrice=Close;
Sell= C>Ref(H,-1);
sellPrice=Close ;
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.
Can you solve this please. I am in high school and I need to solve this in 2 hours. Please help
You and your friend Chirag are cult fans of cricket. However unlike you, Chirag is a compulsive
gambler and regularly bets on India in various matches and tournaments. India and England are
about to play a 5 match T20 tournament in March and Chirag is already pepped up about seeing
India win and making a lot of money. He wants to bet Rs. 25,000 on a double or nothing bet in
which he gets double the money if India wins the tournament, otherwise nothing.
Matches in T20 rarely ever tie so you may neglect the probability of a particular match ending in
a draw. Also both India and England are extremely strong forces in international cricket and
equally likely to win on any given day. Any team that wins 3 matches first wins the trophy.
Unfortunately for Chirag though, the bookie is taking bets on seperate matches only and not the
tournament as a whole. That means he can’t bet on the outcome of the entire tournament and
will have to place the double-or-nothing bets on individual matches itself.
Help Chirag to model how much money he should bet before each match of the tournament so
that in the end, he gets double his money (Rs. 50,000) if India wins the trophy and loses his initial
Rs. 25,000 if India ends defeated.