Bulkowski's Best Buy Months

Written and copyright © 2010-2011 by Thomas N. Bulkowski. All rights reserved.

This article discusses the months of the year that close up most often. Can you buy those months and profit?

Summary

Both the Dow industrials and the S&P 500 show tendencies to have the worst performing month in September followed by a rising trend of up closes ending with December. December is most likely to close up (at least 72% of the time). However, a $10,000 investment from the close at the end of September to the close in December severely underperforms a buy-and-hold approach of buying at the end of December and holding it for a year.

Methodology

I programmed my computer to count the number of times price closed up from one month to the next. For example, if price closed at 10 on December 31, 2009 and on January 31, 2010 , it closed at 11, the up count total for January would increase by 1 since price closed higher than where it started. If February saw price close at 11.50, then the up count total for February would increase by 1. A month showing a lower close would increase the down count total.

To get a percentage, I compared the up counts to the total of up and down counts (unchanged prices were not counted). If the up count total was 15 and down counts were 5 for January, then the percentage of those closing up would be 15/(15+5) or 75%.

The following charts show what I found.

Dow Industrials

Since each year only increases the count totals by 1, I tallied the results started from the beginning of data. For the Dow industrials shown above, that means the tally began October 1, 1928.

The chart shows that September closes higher only 39.5% of the time. December, however, has the highest total of up closes: 72%.

Based on this chart, can a strategy of buying in late September and selling in late December earn more profit than buying at the start of the year and selling at the end? No.

I found that $10,000 invested at the start of 2007 in DDM (an exchange traded fund that has twice the volatility of the Dow industrials), the first full year the fund was in operation, would be worth $5,687.39. The decline is due to the 2007 to 2009 bear market. Buying the last day of September and selling on the last trading day of December would have seen $10,000 drop to $6,319.80. That is only slightly better than the $5,687 for buy and hold.

However, if you were to buy the Dow industrials from the first full year of available data (1930), the buy and hold would be worth $419,673.62 versus just $51,953 for the abbreviated holding period.

Nasdaq Composite

The above chart shows the percentage of time price closed higher each month from the start of data on February 5, 1971.

February and July tie for the lowest up closes. Since the percentage is below 50, those two months close lower most often.

The downward trend from April to October suggests the likelihood of having a poor month grows going into October.

S&P 500 Index

The above chart shows the percentage of time price closed higher each month since January 3, 1950 in the Standard & Poor's 500 index.

Like the Dow industrials, the S&P shows the fewest up closes in September followed by a rising trend through December. April might benefit from IRA investments.

If you buy in late September and sell in late December, might that work well? No.

A test of $10,000 invested in the S&P 500 index from 1951 to 2009 would value a buy-and-hold portfolio at $545,814.98 versus just $76,089.72 for the abbreviated holding pattern.

-- Thomas Bulkowski

Written and copyright © 2010-2011 by Thomas N. Bulkowski. All rights reserved. Living your life is a task so difficult, it has never been attempted before.