Calendar Effects

A subscriber requested review of a strategy that seeks to exploit “Sell in May” by switching between risk-on assets during November-April and risk-off assets during May-October, with assets specified as follows:

• Risk-on – SPDR S&P 500 (SPY), iShares Russell 2000 Index (IWM) and Invesco DWA Technical Leaders (PDP).
• Risk-off – iShares Barclays 20+ Year Treas Bond (TLT) and Invesco S&P 500 Low Volatility (SPLV).

On each portfolio switch date, assets receive equal weight with 0.25% overall penalty for trading frictions. We focus on compound annual growth rate (CAGR), maximum drawdown (MaxDD) measured at 6-month intervals and Sharpe ratio measured at 6-month intervals as key performance statistics. As benchmarks, we consider buying and holding SPY, IWM or TLT and a 60%-40% SPY-TLT portfolio rebalanced frictionlessly at the ends of April and October (60-40). Using April and October dividend-adjusted closes of SPY, IWM, PDP, TLT and SPLV as available during October 2002 (first interval with at least one risk-on and one risk-off asset) through April 2022, and contemporaneous 6-month U.S. Treasury bill (T-bill) yield as the risk-free rate, we find that: Keep Reading

Does the seasonal shift marked by the Easter holiday, with the U.S. stock market closed on the preceding Good Friday, produce anomalous returns? To investigate, we analyze the historical behavior of the S&P 500 Index before and after the holiday. Using daily closing levels of the S&P 500 index for 1950-2021 (72 events), we find that: Keep Reading

Are there anomalies for U.S. stock market returns around equity option expiration (OE) days (normally the third Friday of each month, but the preceding Thursday when the market is closed on the third Friday)? To investigate, we examine close-to-close S&P 500 Index returns from five trading days before through five trading days after a moderately large sample of OE days. Using daily closing prices for the index during January 1990 through February 2022 (386 OE days), we find that:

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Does the overnight return effect found pervasively among equity markets, as summarized in “Persistence of Overnight/Intraday Equity Market Return Patterns”, also hold for other asset classes? To investigate, we compare open-to-close (O-C) and close-to-open (C-O) average returns, standard deviations of returns and cumulative performances for the exchange-traded funds (ETF) used as asset class proxies in the Simple Asset Class ETF Momentum Strategy (SACEMS). Using daily dividend-adjusted opening and closing prices of these ETFs during mid-December 2007 (inception of the youngest ETF) through early March 2022, we find that: Keep Reading

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: Keep Reading

What best explains the decades-long pattern of strong overnight and weak intraday returns in most equity markets? In his January 2022 paper entitled “They Still Haven’t Told You”, Bruce Knuteson reviews possible explanations for this pattern and identifies the most likely. His theoretical equity index benchmark is a random walk with slight upward drift (due to general economic expansion and survivorship bias), with intraday return on average larger than overnight return due to higher intraday risk. Using close-to-open and open-to-close levels of 21 major stock market indexes as available during January 1990 through December 2021, he finds that: Keep Reading

Does the Turn-of-the-Month Effect, a concentration of positive stock market returns around the turns of calendar months, work across a broad set of asset classes. To investigate, we measure turn-of-the-month (TOTM) returns for the following nine asset class exchange-traded funds (ETF) used in the “Simple Asset Class ETF Momentum Strategy” and the “Simple Asset Class ETF Value Strategy”:

• PowerShares DB Commodity Index Tracking (DBC)
• iShares MSCI Emerging Markets Index (EEM)
• iShares JPMorgan Emerging Markets Bond Fund (EMB) 
• iShares MSCI EAFE Index (EFA)
• SPDR Gold Shares (GLD)
• iShares Russell 2000 Index (IWM)
• iShares iBoxx $ Investment Grade Corporate Bond (LQD)
• SPDR S&P 500 (SPY)
• iShares Barclays 20+ Year Treasury Bond (TLT)
• Vanguard REIT ETF (VNQ)

We define TOTM as the eight-trading day interval from the close five trading days before the first trading day of a month to the close on the fourth trading day of the month. Using daily dividend-adjusted closes for these ETFs from their respective inceptions (ranging from February 1993 for SPY to December 2007 for EMB) through early February 2022, we find that: Keep Reading

A reader inquired whether the Turn-of-the-Month Effect, a concentration of positive stock market returns around the turns of calendar months, works for U.S. stock market sectors. To investigate, we measure turn-of-the-month (TOTM) returns for the nine sector exchange-traded funds (ETF) defined by the Select Sector Standard & Poor’s Depository Receipts (SPDR), all of which have traded since December 1998:

• Materials Select Sector SPDR (XLB)
• Energy Select Sector SPDR (XLE)
• Financial Select Sector SPDR (XLF)
• Industrial Select Sector SPDR (XLI)
• Technology Select Sector SPDR (XLK)
• Consumer Staples Select Sector SPDR (XLP)
• Utilities Select Sector SPDR (XLU)
• Health Care Select Sector SPDR (XLV)
• Consumer Discretionary Select SPDR (XLY)

We define TOTM as the eight-trading day interval from the close five trading days before the first trading day of a month to the close on the fourth trading day of the month. Using daily dividend-adjusted closes for the sector ETFs and for S&P Depository Receipts (SPY) as a benchmark from December 1998 through early February 2022, we find that: Keep Reading

“Turn-of-the-Month Effect Persistence and Robustness” indicates that average absolute returns during the turn-of-the-month (TOTM) are strong for both bull and bear markets. Does a strategy of capturing all bull market returns and TOTM returns only during bear markets perform well? To investigate, we apply four strategies to S&P Depository Receipts (SPY) as a tradable proxy for the stock market:

1. Buy and hold SPY.
2. Hold SPY (cash) when SPY closes above (below) its 200-day simple moving average (SMA200).
3. Hold SPY from the close five trading days before through the close four trading days after the last trading day of each month and cash at all other times (TOTM).
4. Hold SPY when SPY closes above its 200-day SMA and otherwise use the TOTM strategy (SMA200 or TOTM).

We explore sensitivities of these strategies to a range of one-way SPY-cash switching frictions, with baseline 0.1%. Using daily dividend-adjusted SPY from the end of January 1993 through early February 2022 and contemporaneous 3-month Treasury bill (T-bill) yields, we find that: Keep Reading

Is the Turn-of-the-Month (TOTM) effect, a concentration of relatively strong stock market returns around the turns of calendar months, persistent over time and robust to different market conditions. Does it exist for all calendar months? Does it persist throughout the U.S. political cycle? Does it work for different equity indexes? To investigate, we define TOTM as the interval from the close five trading days before to the close four trading days after the last trading day of the month (a total of eight trading days, centered on the monthly close). Using daily closes for the S&P 500 Index since January 1928 and for the Russell 2000 Index since mid-September 1987, both through early February 2022, we find that: Keep Reading