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Combining Overnight and TOTM Effects

Steve LeCompte | | Posted in: Calendar Effects

Guide Calendar Effects Time of day and overnight

Key Insight

A SPY turn-of-the-month close-to-open strategy (long close-to-open only during TOTM, cash otherwise; eight round-trips monthly) earned 0.0% net CAGR with -39% MaxDD at 0.06% friction per round-trip (Feb 1993–Feb 2022; daily data).

With reference to "Turn-of-the-Month Effect Persistence and Robustness" and "Persistence of Overnight/Intraday Equity Market Return Patterns", a subscriber asked about a strategy that is long SPDR S&P 500 ETF Trust (SPY) only from market close to market open during the turn-of-the-month (TOTM). To investigate, we consider three strategies:

  1. TOTM Close-to-Open: long SPY from close-to-open during TOTM, and otherwise in cash (eight round-trip trades per month).
  2. TOTM Close-to-Close: long SPY continuously during TOTM, and otherwise in cash (one round-trip trade per month).
  3. B&H: buy and hold SPY.

We initially ignore trading frictions, but then look at breakeven frictions for the first strategy. Because of trading frequency, we ignore return on cash. We focus on compound annual growth rate (CAGR) and maximum drawdown (MaxDD) based on daily data as key performance statistics. Using daily dividend-adjusted opens and closes for SPY during February 1993 (inception) through February 2022, we find that:

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Calendar Effects guide

More on time of day and overnight

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Further Reading

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