Saturday, April 2, 2011

Day of the Month Investing

Amazingly one of the most consistently profitable trading methods I've found is a system designed to go long on the first trading day of the month. It's absurdly simple, and has tested well even in bear market. It's also an uncomfortable system to trade since I want an indicator or some confirmation to go long. It just makes me feel better about the trade than just blindly going long on the first trading day of the month.

Anyway here are the results of my testing. You should always verify results on your own and keep in mind I'm not recommending this system. I'm using it but it's only one of many strategies I use during the month. It only gives you one trade per month but it has captured most of the gains in the market for such a short exposure.

Okay let's take a look at the following example.

The rules were buy 100 shares of spy at the market close on the last trading day of the month, and sell on the market open on the 2nd trading day of the month. No other rules were used. (The trading day is not the same as the day of the month. For example the 1st day of the month might be a Saturday so the first trading day of the month would be the 3rd day of the month. )

Here is the equity curve:

This is impressive considering that buying 100 shares of spy back in 1988 and selling it on the same date as this test would have given you $10760. This strategy of being in the market only a couple days per month collected almost all of the gains in the market without the massive draw downs of buy and hold.

I've run other tests and perhaps I'll add the results on to this post later. Day trading this method works as well. Simply buying the open on the 1st trading day of the month and selling on the close of that day did very well also.

I'm not suggesting you run out and do this strategy immediately. Do your own homework. I find it very impressive that most of the overall market performance in the S&P 500 is on the 1st few trading days of the month.

Larry Connors in his book Short Term Strategies that Work also looks at this property of the markets. He, however found significant out performance toward the end of the month. He found an up bias toward the end of the month which I did as well in my testing.

Also in Robert Colby's book The Encyclopedia of Technical Market Indicators, he found significant out performance of a buy and hold strategy on the Dow by buying on the 26th of the month, and selling by the 6th of the next month.

And finally here is another blog entry that did a similar test:

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