Expect a market drop Wednesday - InvestingChannel

Expect a market drop Wednesday

Sorry. We can’t read the future.

We can only read the past.

And that led us to this conclusion: 

The market will close lower than it opens next Wednesday.

Woody Harrelson What GIF by Saturday Night Live

Yes, history says the last trading day of the month is bearish.

How do we know this? the last 20 years, the S&P 500 ETF SPY closes lower than it opens 56.19% of the time.

That might not sound like much.

Considering the SPY the average is around 47%, it’s nothing to sneeze at.

But that’s only part of the story. 

Check out some of these stats.

Breaking down the major markets

Let’s get right into it.

We tested if the market closes higher than the open on the last trading day of the month across several ETFs.

Here are some definitions to help you out.

  • Win-Rate – The total number of wins divided by the total number of trades.
  • Profit Factor – The total amount of money won divided by the total amount of money lost, where both are positive numbers.
    • Example: I won $500 and lost $200. My profit factor is 500/200 = 2.5
    • Profit factors less than 1 mean you lost money overall, equal to 1 you broke even, and greater than 1 you made money.

This backtest covers 20 years of data or a little more than 200 trades.

On average, the market closes higher than the open around 53% of the time. 

We tested multiple index ETFs to see whether the phenomenon was broad-based. All the major stock index ETFs landed in roughly the same place.

Additionally, we added tests for the long-dated bonds ETF TLT and gold’s GLD since they tend to move opposite the market. 

Interpreting the results

If one index ETF showed came in at a 45% win-rate and all the others at 53%, we could assume that is just an outlier and noise in the data.

However, all the indexes point to the same bias. This is also confirmed by the near 58% win-rate in the TLT which tends to trade in the opposite direction of stocks.

We also know from the profit factors below 1 that buying the open and selling the close on the last day of the month in these ETFs is a loser overall.

With over 200 samples, the edge here is statistically significant. 

But how consistent are the results?

For that, we want to look at the equity curve (IE you’re P&L).

The curve is fairly consistent, even with the little wiggle towards the end.

Trends can and will change, so it’s something to always be on the lookout for. But, this graph shows a pretty clear downward bias.

Turning this into trades

As far as a trading strategy goes, there are many different ways to play this.

Leveraged ETFs like the SSO and SDS play off the SPY. Similar ones exist for the other ETFs.

If you’re into the world of options, there’s a myriad of strategies from buying puts to credit and debit spreads.

The key is to find something that works for you.

Check out the data for yourself

We incorporated all the data from the backtests here for you to download. Play around with it and see what you come up with.

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