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Can You Make 100% Of The Market Gains Trading Only 6 Days A Month?

Can You Make 100% Of The Market Gains Trading Only 6 Days A Month? Read On...
Friday February 4, 9:13 am ET
By Larry Connors

One of the things we are constantly striving to do at TradingMarkets is publish original market research, especially research which has been quantified. This week I'm going to share some new research with you which will hopefully improve your trading even further.
The Pheonomenon

One of the things many of us have heard over the years is that the last few days of the month and the first few trading days of the new month tend to have bullish tendencies. I first heard of this when Kevin Haggerty wrote about it here on the TradingMarkets site about six years ago. Kevin, as you know, was the head of trading for Fidelity Capital Markets for a number of years, so he has had the chance to observe this market behavior better than most of us. Since Kevin first mentioned it, I've observed the behavior enough times over the years to prompt me to research it further and to quantify it. The results from our research are very interesting and may provide you with some edges you can take advantage of in the future.

The Question

We asked the following question in our tests: How has the S&P 500 (CBOE:^SPX - News), Nasdaq 100 and Semiconductor Index (Philadelphia:^SOXX - News) done if one had purchased these markets (on the opening) a few trading days before the month ended and exited a few days into the month? We looked at buying 1-5 trading days before month's end as the entry and exiting 1-5 trading days into the new month (slippage and commission are not included. Past results are not indicative of future returns. All results were created from simulated trading).

The Results

What we found was eye-opening. Most combinations did well. The sweet spot in the combinations was the one model which had you entering on the open the day before the last trading day of the month and exiting on the open on the fifth trading day of the month (you would be in the market a total of six trading days). How well did this do? Here are some results:

The SPX gained 753 points from January 1995 through the end of 2004 (10 years). But, had you purchased the SPX the day before the last trading day of the month, and exited on the opening of the fifth trading day of the month (and you stayed out of the market the rest of the month), the gains were 820 points. That's right. Those six trading days, on a net basis, led to all the market gains. The remaining 14-16 trading days of the month led nowhere. Sixty-four percent of the trades were successful.

Nasdaq 100

What about the Nasdaq? The gains hold here, too. The Nasdaq 100 has gained 1217 points over the past 10 years. But, buying and selling only over the six-day period showed gains of 1354 points.

Semiconductors

Now let's look at the SOX (Semiconductor Index). Are you ready to have your eyes opened? The SOX gained 293 points over the past 10 years. Yet, buying and exiting during the end of the month/beginning of the month period gained 1080 points. It outperformed the SOX by more than three times, while being in the market only 28% of the time!

200-Day Moving Average

Let's go further. You know from How Markets Really Work* that over the past 15 years markets have performed better on the long side above their 200 day moving average and worse below their 200 day MA. So let's add the 200-day moving average to this. Let's only buy on the opening the day before the last trading day of the month and exit on the open on the fifth trading day of the month. And we'll only take this trade if the index is above its 200-day simple moving average. When we do this, our market exposure is now lowered to only 19%. Yet, the gains in the SPX basically replicate the total points gained while being in the market 100% of the time (753 points vs. 743 points). For the Nasdaq, the gains jump up to 1768 points versus 1217 for buy and hold. And for the SOX, the gains are 952 points versus 293 for buy and hold. The SOX gains are even more impressive because you were only in the market 14% of the time.

SOX Equity Chart

Here is an equity chart of the SOX trading it only six days a month while it's above its 200-day moving average. As you can see, a hypothetical $100,000 account has grown to better than $550,000 with a compounded annual rate of return of nearly 20%. You were only in the market 14% of the time over the past decade.



TradingMarkets Swing Trading College

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Summary and Conclusion

Obviously, it appears the end of the month/early month trading bias is real. Why is this so? It's likely that money managers see the greatest inflows of cash during that period of time and they are aggressively putting this money to work.

There are many, many ways to take advantage of this information, and in later weeks I'll be spending some time sharing these ways with you..

Have a great week trading (and go Pats)!

Larry Connors