The end of the turn of the month effect? Strategy and re-balancing during end-of-month

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Historically and up to 2013, equities have exhibited a positive bias during the end of the month, called the turn of the month effect.

Is the turn of the month effect still effective?

Here is an turn of the month effect example of buying the SPY etf on the first down-day after the 23rd and selling on the first up-day of the next month . Trading is at the same day close.

EOM turn of the month effect

Turn of the month effectinvesting has been well documented in academic papers as well as blogs. The main reason quoted for this persistent bias has been turn of the month effect window dressing and rebalancing of big funds.

As one of my favorite author/blogger/trader, Mr. Grøtte, has also recently blogged here the turn of the month effect is no more.

Turn of the month effect is no more

EOM 13-15 turn of the month effect

Why is this important to know?

A lot of investors re-balance monthly. The day of the re-balance used to be somewhat important as there was an turn of the month effect bias. So it was better to ‘buy’ at the end of the month rather than at the beginning of the month. As of late (2013) this is less true.

What this means in practice is that the specific timing for re-balancing monthly strategies may be less important than it used to be. It does not mean that turn of the month has no effect at all, it is just less relevant than it used to be.

Broader Strategy Development Implications from the turn of the month effect

Market edges are best revealed by understanding and measuring pattern based human behavior.   For a long time, the money flows supported end of the month as a buying edge but recently market patterns shifted.

Market edges are not eternal.   As they are observed and traded, they can morph.   Logical Invest’s process first involves uncovering edges that are well grounded.  Next we systematically statically test for the stability of these edges.   If we are using them in a model, we monitor if an edge sufficiently shifts out of bounds from historical patterns, then we further investigate and adjust the models and guidance as appropriate.

2017-10-02T20:00:00+00:00By |7 Comments

About the Author:

Vangelis has a B.A. in Economics from Cornell University and an M.F.A. in Film producing/financing from the University of Southern California. After the 2008 crisis he devoted his time to researching, trading and blogging about quantitative strategies. He has built, run and tested literally thousands of trading systems using Matlab, Python, C#, QuantShare and Amibroker. His "Sanz Prophet" quantitative blog has been part of the "Whole Street" quant blog aggregator since inception. Vangelis is series 65 certified.

7 Comments

  1. Peter 02/19/2015 at 6:04 am

    Great post.

  2. Vangelis 02/19/2015 at 3:16 pm

    Thanks Peter. Maybe we will do more of these.

  3. STEPHEN 02/24/2015 at 8:55 am

    Does this suggest that L-I may move from monthly re-balancing to re-balancing when required?

    • Vangelis 02/24/2015 at 6:21 pm

      Not really.You can say that ‘monthly re-balancing’ and ‘re-balancing required’ are one and the same. Exception is the MY strategy which re-balances every two weeks. If we create a new strategy that needs specific re-balance timing, of course we will follow and publish the specific timing rules.
      So far most of our models work with monthly re-balancing.

  4. Oliveira, CMT 05/27/2015 at 9:12 am

    Also didn’t worked from 2008 to 2010…

  5. Daniel Williams 05/28/2015 at 3:24 am

    Assumption is that each periodic balancing period is the same, ie time is constant, which is where people become unstuck.

  6. Daniel Williams 05/28/2015 at 3:27 am

    Nice website, will be interesting to see how the strategies perform into 2018-2019 particularly during live bear markets.

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