Day of Month Seasonality for December

30Nov12

A topic recently on me noggin has been day-of-month seasonality (read more, more, and more). Using a simple walk-forward test to minimize hindsight bias, I showed that trading the days of the month that have been strong historically has consistently led to much stronger returns in the future. That’s as true today as it was in 1950.

The “strategy” has been uber effective in the two months since I shared it, with the S&P 500 returning 0.15% on qualifying days, vs just -0.29% on non-qualifying days.

Below is the DOM seasonality calendar for next month, broken out by quartiles (read why), with quartile 1 indicating the strongest days and quartile 4 the weakest.

20121130.05

I’ve made just two exceptions: 12/12, the last day of the FRB meet, and 12/24, the day before Christmas.

As I’ve shown previously, Fed days have been consistently bullish events for the last two decades, so even though 12/12 was already a quartile 2 day, I’ve highlighted it dark green. And the day before exchange holidays tends to be slightly bullish, so even though 12/24 was originally a quartile 3 day, I’ve left it a question mark.

Note that 12/31 is also the day before an exchange holiday, but the last day of the year is historically weak, so I’ve let it stand as a quartile 3 day.

Happy Trading,
ms

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4 Responses to “Day of Month Seasonality for December”

  1. 1 Alex Argyros

    Very interesting, Michael.

    I have two questions:

    1. What constitutes a “day?” Is buy on open and sell at close? What would the statistics look like if one bought on close of the previous day and held overnight (to sell either on open or on close)?

    2. Does this strike you as a potential “mechanical” system: buy on 1 days and short on 4 days?

    Thanks,
    Alex

    • 2 MarketSci

      Hello Alex – the number I’ve shown in the past are close-to-close (so the quartile listed each day is from the previous day’s close to today’s close).

      I don’t think it’s a bad observation/strategy, but I do think there are other better opportunities. I think it’s better suited as one of multiple inputs into a trading strategy.

      michael

  2. 3 Alex Argyros

    Reading through your previous post, I see that you don’t think that this strategy is robust enough to stand on its own as a mechanical system. So, let me modify my question to ask you why? For example, if going long on #1 days produces annualized returns of almost 25%, why wouldn’t that constitute a valuable trading system? Of course, one could juice the system by only trading during periods one as identified as bullish (using some standard measure of a bull market).


  1. 1 Rest At A Minimum

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