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We're currently entering into (the middle of) the so-called 'turn-of-the- month' time frame, regularly defined as the last two sessions (sometimes the last session only) and the first three sessions of each month.

You'll find a lot of research on the blogospere about the Turn of The Month Effect (a calendar seasonality, where historically returns for the turn of the month are - or were - significantly above average in comparison to the rest of the month due to cash flows at the end of the month like salaries, interest payments, etc.), but this time I'll focus on the first (subject to tomorrow's posting) and the last session of the month (this posting) only, checking if - and to what extend- a tradable edge might be provided.

First of all Table I shows the SPY's historical end-of-day performance (since 1/1/1990) for the 2nd last, the last, the first and the 2nd session of a month, assumed one went long on close of the respective previous session (e.g. on close of the last session of the previous month with respect to the first session of a month, and on close of the 2nd last session of a month with respect to the last session of a month).

Although historically chances for a higher close (percentage of Winning Trades) and end-of-day returns (Median Trade, Geometric Growth Rate per Trade) on the 2nd last and the 2nd session of a month have been (slightly) above average, it is the first session of the month which makes for the positive turn-of-the-month effect, while the last session shows a remarkable negative bias.

With respect to the first session (of a month), not only chances for a higher close are approximately 2:1 (on 2 out of every 3 sessions, or 63.31% of the time), while the random chance for a higher close is more or less even only, but the distribution of returns on the first session of a month is significantly positively skewed (Distribution of Returns: one half of the respective returns on the first session of a month lie withing the top third - above 66.63% - of the distribution of at-any-time returns). The Median Winning Trade (+0.71%) significantly exceeds the respective at-any-time median winning trade (+0.56%), while the Median Losing Trade (-0.42%) significantly surpasses the respective at-any-time Median Losing Trade (-0.58%).

Figure I below shows the SPY's 'profitability density function' (distribution of daily returns) for the first session of a month.

Figure I

Readily identifiable is the fact that the bulk of the values (including the median) lie to the right of the (benchmark's) mean. Figure II below now shows the SPY's 'profitability density function' (distribution of daily returns) for the last session of a month.

Figure II

It looks like as if the distribution table for the first session of the month was reversed left to right. Now the bulk of the values (including the median) lie to the left of the (benchmark's) mean.

Table II below shows the SPY's historical intraday performance (since 01/01/1990) for the last session of the month on the open (open vs. previous close), during the first hour of the session (1st hr. vs. open), at the start of the last hour in comparison to the end of the first hour of the session (last hr. vs. 1st hr.) - the middle part of the session - and during the last hour of the session.

Since 6/30/2009 (last 15 month), the SPY closed lower on 12 out of 15 end-of-month sessions (thereof the last 6), never opened up better than +0.43% and never gained more than +0.34% on the close. In addition, the SPY was trading below the previous session's close (in this event the close on Wednesday, September 29) at one point in time during the last session of the month (in this event on Thursday, September 30) on all of the last 15 occurrences (no opening gap up) - thereof on 11 occurrences at least -1.0% lower -, while it left an unfilled opening gap down (an intraday high below the previous session's close) on 3 out of the last 15 occurrences, and posted an intraday high greater than +1.0% only once (in comparison to 11 sessions with an intraday low greater than -1.0%)

Conclusions:

Although historically returns for the turn of the month are - or were - significantly above average in comparison to the rest of the month, this does not apply - neither long-term nor especially with respect to the most recent occurrences - to the SPY's last session of the month. A favorable opportunity on the short side of the market might be provided at today's (Tuesday, September 29) close (especially in the event of a higher close), targeting a (significantly) lower price at least once during tomorrow's session (September 30, 2010).

P.s: The first session of the month - and any tradable edges provided - will be subject to another posting on Thursday, September 30. Stay tuned ...

Successful trading,