The “Monthly W” (in Video)
Included on our monthly seasonality map is a weak observation I call the Monthly W.
In a nutshell, at this moment in history, the beginning, middle and end of each month (excluding the very last day) tend to be bullish, and the times in between bearish. The effect isn’t strong enough all by itself to justify a trade, but I do think it deserves to be one of many tools in the trader’s toolbox.
To illustrate, the following graph shows average excess return per day of the month for the S&P 500 over the last 20 years. Obviously every month doesn’t have exactly 21-days so I’ve normalized the data to always fit our 21-day chart (see geek notes below).
See the W?
Returns tend to be higher at the beginning, middle and end of the month (excluding the very last day), and negative in between. Here we’re looking at excess average return, but other metrics (median return, volatility-adjusted return, etc.) all paint a similar picture.
Geek notes: I’ve massaged the data quite a bit to make it more useful: (a) I’ve fit all months to 21 days; months with less have been stretched and months with more have been compressed. And (b) it doesn’t make sense to be overly precise with something that’s by its nature not, so I’ve smoothed results by averaging each day’s average return with the day before and after. For example, the result on day 5 is actually the average of days 4, 5, and 6.
The evolution of the W…
The video below shows how the Monthly W has evolved since 1950. Each frame covers 20 years, so frame one is from 1950 to 1969, frame two from 1951 to 1970, etc. Click to play.
1. The beginning and end of the month have remained consistently bullish over the entire 60 years (read more about Turn of the Month seasonality).
2. It’s difficult to catch because of how I’ve smoothed the data, but in the last 20 years or so the very last day of the month has been very blah (read more about the Last Day of the Month Blahs).
3. Earlier in the sample, the month resembled more of a “U” shape with lower returns for the entire middle of the month. This flattened out in the 70’s and 80’s, and finally, over the last 20 years we see a strong “W” shape emerge.
Again, I would reiterate that I don’t think monthly seasonality is strong enough all by itself to justify a trade, but as the video shows, these effects have tended to stay consistent enough that I think they deserve to be one of many tools in the trader’s toolbox.
You can see our own take on the Monthly W and other seasonality plays on our monthly seasonality map.
P.S. a big THANKS to Nick Gogerty for showing me how to put together the time lapse chart. You were right sir, not as difficult as it looked.
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Filed under: Evolving Markets, Time-based | 16 Comments