Daily Commentary - Posted on Sunday, September 5, 2010, 11:49 AM GMT +1

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Sep Sunday 5

Monthly and Labor Day Seasonalities

I’am back from vacation, therefore the infrequent postings during the last two weeks.

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The market started into the month of September with some impressive gains. The SPY (S&P 500 SPDR.) posted three consecutive sessions with a gain greater than +0.90% (+2.99%, +0.93%, +1.30%), and is up +5.30% month-to-date on close of September’s third session, at the same time the session immediately preceding Labor Day (exchange holiday) on Monday.

Table I below shows the SPY‘s next session performance (in this event the session on Tuesday, September 7, 2010) assumed one went long on close …

  • Strat. #1: of a third consecutive session with a gain gt. +0.90%,
  • Strat. #2: of a third higher close (gt. 0%) during the first three sessions of a(ny) month,
  • Strat. #3: of a third higher close (gt. +0.90%) during the first three sessions of a(ny) month,
  • Strat. #4: of the third sessions of a month where the SPY is up at least +5.00% month-to-date,
  • Strat. #5: of a third consecutive positive (higher close) session immediately preceding an exchange holiday,
  • Strat. #6: of a third consecutive positive (higher close) session immediately preceding Labor Day,
  • Strat. #7: of a positive session (gain gt. +1.00%) immediately preceding Labor Day.

All seven setups were triggered on close of Friday, September 3, 2010.

Here is the link to the stats in a more ‘readable’, original size: Statistics 1

Leaving alone the fact that on Monday the markets will be closed for Labor Day (Strat. #6, #7), historical probabilities and odds are (partly heavily) lopsided in favor of an at least short-term consolidation of the market’s recent gains (a lower close). Even for setup #2 (three higher closes right at the start of any month, not a rare occurrence) where historical probabilites and odds for a fourth higher close (on Tuesday’s session) are more or less even, the median trade is negative, and the distribution of returns sub-par as well (the median trade shows a significantly lower rate of return than the median return (=50%) within the at-any-time distribution of daily returns).

But there’re good news as well: When the market started on a strong note into the month (Strat. #2 with three higher close on the first three sessions of a month), out of those 45 occurrences the SPY lost more than -1.00% (max. loss -1.02%) on the fourth session only once,

In addition, it is at least interesting to note that since 01/01/1990 there were two other occurrences where the SPY posted three consecutive higher closes immediatley preceding Labor Day: 08/29/2003 and 09/01/1995.

With respect to both occurrences, the SPY did never look back over the course of the then following five sessions, means it never posted a close below the session’s close immediately preceding Labor Day (in this event Friday, September 3, 2010) during the then following five sessions (and posted a lower close in comparison to the previous session’s close over the course of the then following five sessions only once, all other sessions closed with a gain) .

In good fun (especially due to the – statistically irrelevant – sample size of two occurrences only): But on close of Tuesday, September 7, 2010 something has to give (will fail): in the event of a(nother) higher close, setups #3 and #4 (a strong start into the month) – up to now with a spotlessly success rate calling for a lower close -, or – in the event of a lower close – setup #6 (three higher closes immediately preceding Labor Day) up to now with a spotlessly success rate calling for higher closes over the course of all of the next five sessions.

Successful trading,
Frank

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Disclaimer: No position in the securities mentioned in this post at time of writing.

Remarks: Due to their conceptual scope – and if not explicitely stated otherwise , all models/setups/strategies do not account for slippage, fees and transaction costs, do not account for return on cash, do not use position sizing (e.g. Kelly, optimal f) – they’re always ‘all in, do not use leverage (e.g. leveraged ETFs) but a marginable account is mandatory , do not utilize any kind of abnormal market filter (e.g. during market phases with extremely elevated volatility) , do not use intraday buy/sell stops (end-of-day prices only), and models/setups/strategies are not ‘adaptive‘ (do not adjust to the ongoing changes in market conditions like bull and bear markets).

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