The End-Of-The-Month Effect
by Ben Warwick
Back-testing has radically changed the way traders view the markets. Although no one has yet found
the Holy Grail of trading, the ultimate goal remains the same: to create a system that consistently yields
profits with a reasonable amount of risk. Alternatively, a portfolio of trades can be developed using
technical, fundamental and seasonal factors. One such strategy is the end-of-month (EOM) trade.
Studying the EOM effect, mentioned by Martin Zweig as well as others, suggests that the majority of the
stock market's gains are generated during specific periods at the end of one month and the beginning of
the next. This phenomenon appears to be caused by the tendency of corporate equity holders to group
their purchases at month's end. Considering the size of the mutual fund industry (about $500 billion), it
seems reasonable to expect such an anomaly to occur.
I tested four different holding periods from June 1988 to February 1991 to determine the one with the
best risk/reward parameters:
I Buy 3 days before end of month, sell 1st day of next month
II Buy 3 days before end of month, sell 2nd day of next month
III Buy 2 days before end of month, sell 1st day of next month
IVBuy 2 days before end of month, sell 2nd day of next month
As Figures 1 through 4 show, the third holding period yields the best results in both performance
categories, average winner/average loser and average winner/average winning drawdown. The maximum
drawdown for holding periods I and II of 1,143 points ($5,715 in the Standard & Poor's 500), however, is
quite large. It makes sense to use a stop-loss technique to manage one's risk.