Regular readers of this blog know that one of our favorite topics is stock market seasonality. For better or worse there is not all that much research out there on the topic. Fortunately for us, CXO Advisory Group tracked down a research paper that takes a comprehensive look at the turn-of-the-month effect.
The turn-of-the-month effect is the tendency for the stock market to perform well around the end of the month and the beginning of the new month. This new research finds ample evidence for this effect both domestically and globally. Interestingly the researchers find no real explanation(s) for this effect.
We had touched on this topic earlier when a major bank brought out a series of investment products designed to take advantage of this effect and the pre-holiday effect in a number of different markets. One can read about their efforts here. This is not the first effort to exploit these anomalies. The Fosback Timing System has a long, real-time, real-money track record.
Seasonal anomalies are not limited to the end-of-the month and pre-holiday time periods. Research into the so-called “Sell in May” phenomenon and the Presidential election cycle provides evidence for predictability over longer term time frames. Additional research shows that the stock market underperforms and is more volatile when Congress is in session.
There are a number of interesting threads in the broad domain of seasonality. We chose to highlight it for two reasons. First, because informed investors whether they are active or passive should know about these tendencies. This is not particularly controversial.
Second, for individual investors with an interest in the stock market and a limited amount of time to devote to it may find market timing strategies that utilize seasonality appealing. Market timing is clearly controversial, but no one argues that one should devote their entire portfolio to the strategy. However, one could argue that a well-designed market timing system is less time intensive than that required to manage a ten or twenty stock portfolio.
The bottom line is that it is up to each individual to decide how they will spend their limited time and resources. For some people investments are the last thing they would like to spend their time on. For those who embrace the challenge(s) of the market would do well to read Brett Steenbarger at TraderFeed. There he writes that traders should focus on, and embrace, their unique strengths as traders so as to maximize the potential benefits of their work.