Double Your Stock Market Returns Using Seasonality

Double your stock market returns with seasonality

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I like to take a quantitative approach to the markets and I find seasonal factors very interesting. In this article, I investigate whether trading on different days of the month can deliver better returns in the stock market.

I will firstly look at the returns on each trading day of each month. Then I will turn this into a trading strategy that exploits this information and compares it to a buy and hold strategy.

Trading Idea

I was listening to an excellent Podcast Interview with Jay Kaeppel. In this interview, Jay talks a lot about seasonal factors and I wanted to have a look and see whether I could replicate his results.

Market and Data

I am carrying out this test on the S&P 500 index. The S&P 500 is weighted by capitalization and represents the share price of the largest US listed companies. The data is from Yahoo Finance and I have used a 21 year period from the start of 1995 to the end of 2015.

Analysis Method

My analysis has been carried out using a Tradinformed Excel Backtest Model. These are an affordable and flexible way for anyone to test their own trading strategies on any market and timeframe.

Trading Day Results

Stock Market Returns by Day of the Month

The results showed that there is a significant variation between the returns on each trading day. The 1st trading day of each month was the most profitable day to be in the market. This is closely followed by the returns on the 11th trading day.

Trading Day Trading Strategy

Based on the returns by trading day I have analyzed a trading strategy that is in the market on:

  • Days 1-3
  • Days 9-12
  • Days 19 – end of the month

Comparing Trading Day Strategy with Buy and Hold

I tested the Buy and Hold and Trading Day Strategy and I got the following results.

Buy and Hold Day of the Month Strategy
Initial Capital$100,000$100,000
Final Capital$350,558$695,498
Gross Winning Trades$250,558$1,752,846
Gross Losing Trades0$-1,157,348
Net Profit$250,558$595,498
Profit Factor-1.51
Winning Trade1288
Losing Trades0195
Win Percentage100.00%59.60%
Largest Winning Trade$250,558$40,751
Largest Losing Trade0$-32,836
Max Drawdown56.80%23.50%
Average Profit Per Trade$250,558$1,233
Number of Trading Years2121
Annual Compounded Return6.20%9.70%

The results showed that the Trading Days Strategy was more than twice as profitable over this time period. In addition, the maximum drawdown is less than half of the Buy and Hold Strategy. Looking at the equity curves below we can see that the Buy and Hold experienced deep declines in 2000-2002 in the Dot-com Bubble burst and 2008-2009 Financial Crisis.

Conclusions

The results above show that the Trading Day Strategy significantly outperforms Buy and Hold based on historic data. However, the above test does not take account of trading costs and these would reduce the profitability of the strategy. On balance I think these results could form a useful trading strategy, particularly if combined with other seasonal factors or technical analysis.

If you are interested in trading strategies there are lots more on the Trading Strategies page.