I don't agree Monday will be a bloodbath... Actually I think the opposite, I think we'll have a nice bounce back.
End of Month Opportunity
By Ben Warwick
Columnist
01/27/2000 4:29 PM
Every once in a while, a trade comes along that has everything going for it. That's the case for this month's end-of-month (EOM) trade.
The EOM strategy, which we have discussed in previous columns, involves buying into the market two days before month's end and exiting four days later. For this month, we will initiate a long position at the end of trading on Friday, Jan. 28, and close it out next Thursday.
The EOM trade has been the subject of numerous market studies for at least the last two decades. But even with all of this interest, the trade still manages to deliver striking returns. In fact, as the graph below shows the EOM has actually improved during the last twelve years.
The EOM strategy, which establishes a long position two days before months' end and exits four days later if the market is in a downtrend (i.e., below the 10-day moving average), has improved during the last twelve years.
There are several reasons to believe that this month's EOM trade has the potential to succeed. The first reason centers on the market's exceptional volatility. Last year, nearly 60% of all trading days on the Nasdaq resulted in a market move in excess of 1% ? the highest number of 1% moves in recent history. The S&P 500 also witnessed record volatility last year, with over 32% of all trading days resulting in a 1% move. With all of this volatility, chances are good that a short-term trader with the patience to wait for an excellent risk-reward opportunity like the EOM will be experience a unusually large payoff if all goes well.
Secondly, the market is very emotion driven. With the recent emphasis placed on the Fed meeting next week, and an interest rate increase in the offing, traders are much more likely to act in a predictable, herd-like fashion, and either bid the market down too much (resulting in an oversold market) or push it too high (resulting in an overbought situation). Considering the rather weak performance of the market this month, we are much closer to the former. As a result, the trade with the best reward and the least risk is a long position, since it is less likely that the market will go any lower.
January has certainly not been kind to market participants. Long-term investors have had nothing to cheer about, as nearly every market index is negative for the year. Similarly, there have been limited trading opportunities in either direction for short-term traders. Hopefully, the EOM is the catalyst we need to start the New Year in the right direction.
Ben Warwick is a principal of The Bornhoft Group Corporation, a registered investment advisor that specializes in alternative investments, and Warwick Capital Management, a quantitative trading firm. The two companies have approximately $165 million in client assets under management. His books include Event Trading, The Handbook of Managed Futures, and The Futures Game.
|
