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Profitable S&P end of quarter strategy

  1. cso1

    1,689 posts.
    As the U.S. markets pick up a bit, an article from this time last year may be of interest.

    http://finance.lycos.com/home/news/story.asp?story=24870905
    Worldly Investor News, 09/27/2001 15:09
    Feel Like a Contrarian?
    by Ben Warwick

    What opportunities lie ahead in the current market downtrend?

    Rising fears and falling corporate profits are just two of the reasons why many investors are convinced that the next twelve months won't bring much joy to the lives of buy-and-hold investors. But in the short-term, big swings of several day's duration has become commonplace. Buying lows and selling highs offers a tantalizing alternative to watching one's mutual fund NAVs steadily erode
    And now that the end of September is upon us, it's time to revisit the most profitable of the Quant View Portfolio's strategies: the EOM (or End of Month).

    Bracing for a Buy

    For those readers not familiar with the strategy, the EOM trade takes advantage of the market's tendency to rise at the end of the month and into the new month. It is entered on the close two days before month's end and held for four trading days.

    The only condition for getting a buy signal is the S&P 500 index trading above its 10-day moving average. Since we are currently nearly 20 index points under that level, it's a near certainty we'll get the nod at today's close.

    If we get the signal, we'll exit on the close next Wednesday, October 3. I suggest using an exchange-traded fund based on the S&P 500 (SPY) or a trader-friendly index fund like those offered by Rydex or ProFunds, to initiate the trade.

    EOQ as Well

    This end-of-month period also coincides with the end of a calendar quarter. As we've mentioned in previous articles, end of quarter periods are somewhat different than standard EOM fare. For starters, quarter-end rallies tend to be dramatic and short-lived. In fact, the best holding period for capturing the EOM effect at the end of each calendar quarter is only two days, or half the time for other months. And the average return for end-of-quarter rallies is about 30% higher than for non quarter-end months.

    However, our testing did not show any tradable difference in the month-end periods at the end of each quarter and the month-end periods for the other nine months of the year.

    A Tough Call

    Buying today's close may be easy to say, but it's hard to do ? especially for me. With the awful consumer confidence report from earlier this week, and an increasing number of companies either reporting large losses or warning of future profit shortfalls, it seems that the only way for the stock market to head is lower.

    As a long-time trader, I've kept fairly careful logs of how my short-term 'gut feel' instincts have performed. As a market indicator, my tuition is less than impressive. In fact, if I had to choose I would probably be better off fading my feelings and emotions, buying when things look their worst while selling at the height of bullishness.

    That's probably why I became a quantitative trader in the first place.

    Ben Warwick is Chief Investment Officer of Sovereign Wealth Management, a registered investment advisor that manages assets for high net worth individuals and institutions throughout the United States. His newest book, The Worldlyinvestor Guide to Beating the Markets, is now available.

    Last year's book, Searching for Alpha, is also available. Click here for more information on the Quantview Portfolio.

    Warwick does not hold positions in any of the securities mentioned.

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