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A Monthly Stock Market Anomaly That Hides in Sight

Jay Kaeppel
2021-09-15
One of the keys to long-term success is to find an "edge" in the markets and exploit it repeatedly. What we find when we look carefully is that often some of the most consistent market edges "hide in plain sight." This piece highlights a monthly phenomenon in the stock market that fits the bill.

Let's look at a time of the month that has demonstrated a strong tendency to witness weakness in the stock market.  

IDENTIFYING "TRADING DAY OF MONTH"

For this piece, we start by counting back trading days from the end of the calendar month. As such:

  • The last trading day of the month is designated as "TDM -1"
  • The 2nd to last trading day of the month is designated as "TDM -2"
  • And so on back to TDM -10

So for example, for September 2021:

  • TDM -11 = 9/16
  • TDM -10 = 9/17
  • TDM -9 = 9/20
  • TDM -8 = 9/21
  • TDM -7 = 9/22
  • TDM -6 = 9/23
  • TDM -5 = 9/24

THE PERIOD UNDER CONSIDERATION

The period will look at is:

  • The 6-day period each month that includes TDM -10 through TDM -5
  • So for September 2021, we would measure from the close on 9/16 through the close on 9/24
  • We will look at 90 years of history from 12/31/1930 through 12/31/2020

1931-2020: 90 YEARS OF RESULTS

The figure below shows the cumulative % price gain for the S&P 500 Index held only during this 6-trading day period each month over the full 90-year test period (i.e., the cumulative price return if one had bought the S&P 500 Index at the close of TDM -11 and sold it six trading days later at the close on the 5th to last trading day of the month, and repeated this process every single month).

Clearly, it is NOT a pretty picture.

For the record, had an investor been stubborn (foolish?) enough to buy-and-hold the S&P 500 Index ONLY during this 6-day period every month starting in January 1931, the cumulative loss through 12/31/2020 would be -94.9%. This was during a 90-year period, which saw the S&P 500 Index grow +24,386% (using price data only) on a buy-and-hold basis.

The table below displays the cumulative hypothetical price-performance achieved by holding the S&P 500 Index:

  • ONLY during trading days TDM -10 through TDM -5 each month
  • During all trading days, NOT including TDM -10 through TDM -5
  • On a Buy-and-Hold Basis

The table below displays the decade-by-decade price performance for holding the S&P 500 Index:

Considering Time of Year

As long as we are venturing out "into the weeds," let's go one step further and point out that there appears to be a, um, seasonal element to this seasonal element. In a nutshell, TDM -10 to -5 performance has been significantly weaker during June through November than during December through May.

The chart below displays the cumulative % return achieved by holding the S&P 500 Index ONLY during TDM -10 through TDM -5 every month, depending on the particular months involved.

Results during December through May are poor but are essentially "hit or miss."  Results during June through November have been mostly "miss."

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