Many have noticed a predictable “first of month” effect in equities; the hypothesis is that the beginning of the month is when funds buy the shares of last month’s top companies, thus pushing up prices.
Black is SPY, red is DIA, and green is QQQQ (now apparently just QQQ?). I use those three ETFs to represent the stocks in the S&P 500, DJIA, and NASDAQ 100. There does seem to be a strong avg daily return on the first of the month across these indices (day 0 is the last day of last month, and the return on day 1 is calculated day1close/day0close-1). That spike in avg returns on the 3rd to last day of the month in the QQQ is interesting… The avg daily returns were calculated from historical data since inception for each ETF.
Of course the chart above says relatively little: we’d need to see if the effect persists across stocks and ETFs, and how strong/weak it is given certain characteristics (e.g. marketcap, price momentum, etc.). Though even on the three largecap index ETFs, the effect seems to persist month after month (stddev would tell us more…), which suggests the possibility of a high probability, very low exposure trading system based on this first of month effect.
R code: http://pastebin.com/71j7ZGpa. TTR library’s “getYahooData” is a life saver: all the price data downloading and processing is self-contained in that single R script.