Blog - Investing Notes

February 9, 2009 - Turn-of-the-Month Effect in Rising and Falling Markets

One of the stock market anomalies we seek to exploit in our Strategy Test is the Turn-of-the-Month (TOTM) Effect, a significant concentration of excess stock market returns around the turns of calendar months. Does the TOTM effect work in both rising and falling stock markets? To answer this question, we define a rising (falling) market to be one that is above (below) its 200-trading day moving average. Using daily closes for the S&P 500 index for the period January 3, 1950 through January 8, 2009 (708 months), we find that:

The following chart summarizes the average S&P 500 index return during intervals of ten trading days over the the entire sample period for:

• All - All intervals.
• Rising - Intervals while the S&P 500 index is rising (69% of the time).
• Falling - Intervals while the S&P 500 index is falling (31% of the time).
• TOTM(L) All - Intervals centered on the last trading days of all months.
• TOTM(F) All - Intervals centered on the first trading days of all months.
• TOTM(L) Rising - Intervals centered on the last trading days of months while the S&P 500 index is rising.
• TOTM(L) Falling - Intervals centered on the last trading days of all months while the S&P 500 index is falling.
• TOTM(F) Rising - Intervals centered on the first trading days of months while the S&P 500 index is rising.
• TOTM(F) Falling - Intervals centered on the first trading days of all months while the S&P 500 index is falling.

The chart shows that the S&P 500 index return during the ten trading days centered on the TOTM is on average about twice the return of the typical ten trading day interval. It does not matter much whether one sets the TOTM intervals relative to the last trading day or the first trading day of the month.

The TOTM effect exists with about the same level of outperformance during both rising and falling markets. However, during falling markets, the TOTM effect is on average a losing proposition (with trading frictions).

In summary, a simple test indicates that the turn-of-the-month effect holds in both rising and falling markets, but is not useful for simple timing during falling markets.

For related research, see Blog Synthesis: Calendar Effects. See especially our blog entry of 7/20/06 on the turn-of-the-month effect.