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As an avid follower of market pricing, I have noticed that the stock market has tended to trade with a firm tone at the turn of the month – the period between the end of one month and the start of the new month. One can only speculate at the reasons behind the strength, which may fall in the anomaly camp. The end of the month and the start of the new month are times for portfolio adjustment, and new money can be allocated to the equity market. However, nailing down an exact reason is difficult.
Given this observation, I decided to quantify the pattern and thought it might be worth sharing the results. The market’s tendencies can change over time and under certain conditions, but activity over the past two years was reviewed to provide insight into month turn activity.
The monthly pattern:
The graphic below highlights the pattern of the S&P 500 ETF (SPY - ETF report) around the turn of the month. Here is a quick overview of the graphic:
Understanding the horizontal or x-axis: Day 5 represents the close of SPY on the fifth trading day before the last trading day of the month, day 0 is the close of SPY on the last trading day of the month, and day -5 is the close of SPY on the fifth trading day of the new month.
Understanding the vertical or y-axis: The price of SPY is indexed to day +5 so that the closing values over time reflect the change on a percentage basis relative to day 5. For example, on day -4 the price of SPY was 1.3% above the price of day 5.
The graphic shows prices on average making a relative low on day 4 and then rallying until day -4. The pattern is higher with a dip and periods of pause.
Between August 2011 and August 2013, SPY has risen 20 of 25 months or 80% of the time between day 4 and day -4. This year, day 4 is Tuesday September 24 while day -4 is Friday October 4th. Clearly, the market does not rally at the turn of every month, but in recent history there has been a bias upward. The graphic following displays the return between day -4 and day 4 by month. Notice that there are clumps of weakness in early 2012. The EZ debt crisis/Greek debt crisis was present during this period.
On average, SPY has risen 1.39% between day 4 and day -4. When just the up periods are averaged, the result is a return of 1.98%. When just the down days are averaged, the result is a return is -0.97%.
The quarterly pattern:
Despite the tendency to trade well at the turn of the month, the pattern is less friendly for the months of September/October – the end of Q3 and start of Q4. The market experienced heavy downdrafts in 1998 and 2008 which created distortions in the turn pattern. 1998 and 2008 were both periods of deep financial crisis. In 1998, the market was stuck in the Russian/LTCM crisis, while in 2008 the market melted down in the wake of the housing crisis and Great Recession.
The graphic shows the results with and without the 1998 and 2008 periods. Excluding 1998 and 2008, the market has tended run higher from five days before the last trading day of the quarter (Day 5) to four days into the new quarter (Day -4). It should also be noted that the market soared post the 9/11 event at the end of the September 2011. This event also provided bias into the statistics, and a third average is provided excluding the activity in 1998, 2001, and 2008.
Results excluding 2008, 2001, and 2008:
Given there have been unusual events in September in three of the fifteen periods, it may be worth taking an average of the remaining twelve years for an indication of “normal” conditions. There is really no such thing as normal in the stock market, but 1998, 2001, and 2008 were unusual and had profound impact on the results.
Excluding these periods, SPY has tended to make a relative low on the last trading day of the quarter (Day 0) and then rally into day -4. The average gain is 1.15% with the market up nine of twelve periods or 75% of the time. The average gain in the nine up periods is 2.02%, while the average loss in the three down periods is 1.47%
The S&P 500 has had a history of trading firm around the turn of the month and the turn of Q3/Q4 when crisis events are excluding. The strength in the September/October period comes a bit late relative to the average of other turns, but there tends to be strength excluding crisis periods. Hopefully this exercise will help you in navigating the month end turn. Good luck.