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Stock Market Continuation and Reversal Months?

Posted in Calendar Effects, Momentum Investing

Are some calendar months more likely to exhibit stock market continuation or reversal than others, perhaps due to seasonal or fund reporting effects? In other words, is intrinsic (times series or absolute) momentum an artifact of some months or all months? To investigate, 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 since December 1949 (using the January 1950 open) and the Russell 2000 Index since September 1987, both through April 2018, 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 October and perhaps April tend to be trend reversal months. Other months are close to trend-neutral.

As a robustness test, we look at two equal subperiods for the 6-month look-back interval.

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 August 1984. Results consistently suggest that February, June, September and November tend to be trend continuation months and that October tends to be a trend reversal month. Results for April and May are notably different by subperiod.

Are correlations material?

The following table summarizes average monthly returns for the S&P 500 Index during February, June, September, October and November when the past 6-month return is positive (> 0) or negative (< 0). For all months, the difference in condition is material. For February, June and September continuation and October reversal, most of the effect follows negative returns. For November continuation, the effect follows positive returns.

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

The next 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 mostly consistent for the three look-back intervals, suggesting that January, February 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 across look-back intervals.

Results for the Russell 2000 Index are different from those for the S&P 500 Index over a longer sample period. Differences are most pronounced for March through June and November, suggesting different behaviors for different asset classes or instability over time. To disentangle, we compare behaviors of both indexes for the 6-month look-back over the Russell 200 Index sample period.

The final chart summarizes correlations between monthly returns and returns over the preceding 6 months for the Russell 2000 Index and for the S&P 500 Index over the life of the former. Results suggest that both explanations, difference in asset classes and instability over time, apply. The most notable residual difference is for June.

In summary, evidence from simple tests on U.S. stock indexes suggests that some calendar months may be more prone to continuation or reversal of trends than others, but effects vary by asset class and may not be reliable enough over time to exploit.

Cautions regarding findings include:

  • S&P 500 Index subperiods and the Russell 2000 Index sample periods are modest relative to the longest look-back interval.
  • Analyses are in-sample (incorporating foreknowledge). Instabilities across subsamples indicate that an investor operating in real time would have different beliefs about continuation and reversal months at different times.
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