Continuation and Reversal Months?

April 18, 2013 • Posted in Calendar Effects

Are some calendar months more likely to exhibit stock market continuation (momentum) or reversal than others? To check, we relate U.S. stock index returns for each calendar month to those for the preceding 3, 6 and 12 months. Using monthly closes of the S&P 500 Index from December 1949 (using the January open for 1949) through March 2013 and the Russell 2000 index from September 1987 through March 2013, we find that:

The following chart summarizes correlations between S&P 500 Index monthly returns and returns over the preceding 3, 6 and 12 months over the available sample period. Results are reasonably consistent for the three look-back intervals, suggesting that February, June, September and November tend to be trend continuation months and that April and October tend to be trend reversal months. Other months tend to be trend-neutral.

As a robustness test, we look at two equal subperiods for the six-month look-back.

SP500-continuation-reversal-months

The next chart summarizes correlations between S&P 500 Index monthly returns and returns over the preceding 6 months for two equal subperiods, with break point at the end of 1981. Results consistently suggest that June, September and November (but not February) tend to be trend continuation months and that October (but not April) tends to be a trend reversal month.

As an additional robustness test, we consider 3-month, 6-month and 12-month look-back intervals for the Russell 2000 Index.

SP500-continuation-reversal-months-subperiods

The final chart summarizes correlations between Russell 2000 Index monthly returns and returns over the preceding 3, 6 and 12 months over the available sample period. Results are somewhat consistent for the three look-back intervals, suggesting that January, February and perhaps August and September tend to be trend continuation months and that March, April, May and June tend to be trend reversal months. Other months tend to be trend-neutral or inconsistent with respect to look-back interval.

Results for the Russell 2000 Index are quite different from those for the S&P 500 Index, suggesting different behaviors for different asset classes or lack of persistence over time.

R2000-continuation-reversal-months

In summary, evidence from simple tests on U.S. stock indexes suggests that some calendar months may be prone to continuation or reversal of trends, but different classes of stocks may behave differently.

Cautions regarding findings include:

  • S&P 500 Index subperiods and the Russell 2000 Index sample periods are short relative to look-back intervals.
  • This analysis does not test stand-alone exploitability via trading strategies.
  • Potential market wildness and/or market adaptation undermine interpretation of statistics.
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