Posted by: Howard Silverblatt on May 4, 2010
I continue to get significant inquires into the First Trade of the Month portfolio. The calculation is basic - you are in the S&P 500 for the first trading day of the month (close-to-close change) and are credited with only the stock price change, all proceeds are reinvested each month, and there is no interest given for the time out of the market.
The beliefs range from ‘just a bazaar stat’ to that additional funds are invested into the market on the first day and therefore create upward pressure which accounts for the over performance.
I have three items of note, however. First in a constant Bull rally, even if the one-day trade is better than most, it can not make up for the other 20 trading days in aggregate. Equally, the same is true of a Bear market, even if the one-day is down, it should not, in aggregate, be worse that the remaining 20 days in aggregate. So, based on some soft research, the higher the directional consistency and volatility, the wider the spreads between the first day of trade and the overall time span. Great since 12/1999 (28.62% vs. -18.17%), but not so good since the Bull rally started in 3/2009 (3.44% vs. 45.57%) or 4/2009 (8.49% vs. 63.55%). Second, I ran the same portfolio based on the last day of the month trade and the result was a gain of 2.26%. Better than the overall index, but considerably less than the 29% first day trade results. And third, outside of my first point about consistency and volatility, I can’t really explain it. But, do I really need to know why it works when it continues to work so well. It’s hard to argue with a box which has produced a 29% return, verses the markets 18% decline, but it’s ridiculous to invest in something you don’t understand. Hopefully some academic will go into it more (sounds like a global dissertation if anyone is ABD), or eventually I will - of course, at that point it will cease working.
Deatials in file