• The Turn-of-the-Month Effect
    Posted by on November 1st, 2010 at 2:39 pm

    I’m reposting this from February. I had done some research on the turn-of-the-month effect:

    Since 1932, most of the S&P 500’s capital gain has come during a seven-day period at the turn of each month—specifically, the last four trading days and the first three trading days of each month. This represents about one-third of the total trading days. During the rest of the month, the stock market actually lost money.

    Here are the numbers: Since the beginning of 1932, the S&P 500 has gained nearly 14,000% which is about 6.5% annualized. Investing in just the last four days and first three days of each month would have returned over 63,000% (not including trading costs). Annualized, that’s 8.6%. However, if you consider that it’s really only 32% of the time, the true annualized rate is over 28%.

    The rest of the month — the other 68% of the time — has resulted in a combined loss of close to 78%.

    Let me add some important caveats. First, I’m not offering this as trading advice. I’m merely showing that the market has historically experienced outsized gains at the turn of each month. Remember that trading in and out of the market is costly and these results don’t include taxes or commissions.

    Secondly, this only refers to capital gains not dividends. A very large part of the market’s total return is due to dividends, and if you’re only invested one-third of the time, you’re going to lose out.

    Having said that, here’s a graph showing what turn-of-the-month investing looks like. The S&P 500 is the red line. The blue line is performance during the seven-day period and the rest of the month is the black line.

    image902.png
    Here’s a look at the average daily gains.

    Day Daily Gain Stand Dev
    Fourth to Last 0.068% 1.064%
    Third to Last 0.021% 1.055%
    Second to Last 0.071% 1.037%
    Last 0.088% 0.997%
    First 0.118% 1.117%
    Second 0.168% 1.065%
    Third 0.155% 1.077%

    Why has the market shown this performance? It’s hard to say. One idea is that we’re seeing a pattern that’s simply the result of random behavior. If you splice and dice any data long enough, you’re bound to find some anomaly.

    My hunch, however, is that there’s something to the turn-of-the-month effect. Perhaps it’s new money coming in or maybe positive business news is more likely to be announced.

    Still, as powerful as the historical data is, I think the effect is too transient to base any investment strategy on.

  • Dollar/Yen Hits Reality, 15-Year Low
    Posted by on November 1st, 2010 at 1:52 pm

    The dollar is being battered by the yen.

    The dollar fell to a fresh 15-year-low against the yen early Monday before investors backed off, reluctant to risk the possibility of another strong Japanese intervention.

    The pair fell to Y80.21, its lowest in 15 years and the closest it has come to the Y79.75 level that has stood since April 1995 as the dollar’s lowest point since the end of World War II.

  • Noonish Market Update
    Posted by on November 1st, 2010 at 12:46 pm

    It’s Monday and it’s another rally we’re having trouble holding onto. The ISM report is helping the market. The S&P 500 got as high as 1195.81 which is just shy of last Monday’s high of 1196.13.

    As of right now, the Buy List is up 0.30% compared with 0.44% for the S&P 500. Intel (INTC) is doing particularly well with shares up over 2% on news of a pickup in chip sales.

    Sysco (SYY) is closing in on $30 just ahead of its earnings report. This tends to be a very stable stock, but I think it could make a run over $30 very soon.

  • ISM = 56.9
    Posted by on November 1st, 2010 at 10:37 am

    Still more confirmation that the Double Dip was a bunch of hooey: the ISM is now at its highest level since May.

    The ISM’s U.S. new orders climbed to 58.9 from 51.1, while the production index jumped to 62.7 from 56.5.

    Employment, Exports

    The employment gauge rose to 57.7 from 56.5, and the index of export orders increased to 60.5 from 54.5.

    The measure of orders waiting to be filled fell to 46 from 46.5 and the index of prices paid increased to 71 from 70.5.

    The inventory index fell to 53.9 from 55.6 in September, which was the highest since July 1984, while a gauge of customer stockpiles rose to 44 from 42.5. A figure higher than 50 means manufacturers increased stockpiles.

    Consumer spending rose less than forecast in September and incomes dropped for the first time in more than a year, a Commerce Department report showed today. Purchases rose 0.2 percent, the smallest gain in the third quarter. Incomes dropped 0.1 percent, the first decrease since July 2009.

    See that little dip earlier this year? Yes, that’s the scary Double Dip. That’s what had the bears screaming from the rafters all summer.

  • Latest from Intrade
    Posted by on November 1st, 2010 at 9:48 am

    With one day to go before the election, I update my implied House result using prices from Intrade:

    Here’s my earlier post which explains how I was able to derive these numbers.

    The latest prices are 54.0 for the 60 seats or more and 85.0 for 50 seats or more. That works out to a GOP gain of 60.1 House seats with a standard deviation of 10.7 seats.

  • The Baby-Step Rally
    Posted by on November 1st, 2010 at 8:54 am

    The market has done very well since late August, even though it’s been in very small increments. Since August 30th, the largest correction has been 1.59%.

  • More on Our Gold Model
    Posted by on November 1st, 2010 at 8:41 am

    Michael Stokes at MarketSci has a great post where he takes a closer look at our Gold Model. He found that using 2.4% as the break-even point produces a slightly better fit. (Here’s my original post.)

    Michaels sums it up with three points; the good, the bad and the geeky:

    The GOOD: there’s clearly something good about the CWS model. The analysis is made a little difficult by the fact that we have so little data to look at (the price of gold didn’t float prior to the late-1960’s), but the model definitely makes sense conceptually and fits the macro trends in gold over the last 40+ years.

    The BAD: during both of those periods (in grey) when the model and gold diverged, long-term real rates were behaving very different than short-term real rates (and better matched the changes in gold). I’m wondering if the model could be improved by incorporating both short and long-term rates. Food for thought for future analysis.

    The GEEKY: the model “works” by trying to predict month-to-month changes in gold, but has only done well modeling the absolute price level of gold. That’s awkward. A model that predicts monthly changes, but is only effective in terms of absolute price, is especially prone to curve-fitting because each monthly prediction impacts all future data points. Just something to roll around in the noggin’.

  • Expect a Pullback this Week
    Posted by on November 1st, 2010 at 8:23 am

    Last Thursday, I noted that the S&P 500 has barely budged over the past few trading days. Well, we can add Friday’s market to the list as well. The S&P 500 lost 0.52 points on Friday, or 0.04%.

    This week, however, I think it’s very likely that we’ll see a sell-off following the Fed’s QE2 announcement. Don’t worry: I don’t think it will be a major sell-off. Bear in mind that with the recent rally that began on August 30th, the market has rallied on 27 sessions and fallen on just 16. The largest pullback based on closing numbers is 1.6%.

    The catalyst for any sell-off will most likely be that the Fed’s QE2 total won’t be as much as Wall Street expects. The number that’s most frequently tossed around is $500 billion in Treasury purchases over the next six months. That’s been estimated to be equivalent to a 0.50% rate cut.

    I’m still expecting a number closer to $250 billion, but no one from the Fed has contacted me for my views. In any event, we’ll know more on Wednesday. Also, the ECB and Bank of England meet on Thursday, so it’s a big week for central bankers.

    The good news that no one wants to hear is that this has been an excellent earnings season. It’s odd how there’s always someone to attack any good news that comes along. According to the last figures, 71% of companies have beaten earnings expectations so far. That’s very, very high.

    I will add with false modesty that all the stocks on our Buy List have beaten earnings this season. We’re not done just yet. There are three more earnings report for the Buy List this week; Moog (MOG-A), Wright Express (WXS) and Becton Dickinson (BDX).

    We’re also heading into what has historically been the best six-month stretch of the year for the market. Bespoke notes that since 1960, the S&P 500 has averaged a 6.4% gain for the November through April period. For May through October, the market has only averaged 0.8%. I should add that the market has also done well for the last three “third years” of a presidential term.

    I’ll be very curious what the ISM Index will say for October. I don’t expect much of a change, but even a little movement should put the Double Dip nonsense to rest. It won’t, of course, but it should.

    Finally, we’ll get the October jobs report on Friday and it will not be pretty.

  • Morning News: November 1, 2010
    Posted by on November 1st, 2010 at 7:01 am

    U.S. Stock-Index Futures Climb as Chinese Manufacturing Expands

    U.K. Manufacturing Growth Unexpectedly Accelerates as Exports Strengthen

    Wall St. Futures Point to Higher Open; Data Eyed

    Oil Rises as Dollar Weakens on Speculation of Fed Credit-Easing Measures

    China Manufacturing Posts Biggest Gain in Six Months

    Awaiting Fed’s Plans, Markets Are in Limbo

    U.S. Economy Grew 2% as Consumer Spending Rises

    Humana Tops Estimates, Lifts Guidance

    Pontiac, 84, Dies of Indifference

    Oracle Seeks $2.3 Billion in SAP Download `Humiliation’ Trial

    A Very Big Week Ahead

    The Joys of the Edge and Dangers of Ignoring the FAT Middle

  • Buy List Update
    Posted by on October 31st, 2010 at 9:58 pm

    Now that October is on the books, let’s take a look at the YTD performance of the Buy List.

    Through October, the Buy List is up 10.25% compared with 6.11% for the S&P 500 (dividends not included).

    Here’s a look at the chart for 2010: