Why You Should Use Monthly Statistics When Investing

Stock prices do not go up with equal chance in each month - it is enough to think of "Santa Claus Rally" and "Sell in May and go away".

There may be multiple reasons in the background of such "periodicity", such as:

local customs (eg.: many people go on vacation in the summer) many employees receive premium in the same month (eg.: in December, before Christmas or in Spring) that is (partially) invested in the stock market fund managers are evaluated at the end of year or at the end of quarter and they must show good results

What is its impact on your investments?

If there's a month when a stock's price falls much more often than going up it is better to avoid buying that stock in that month. This may apply to stock mutual funds an stock indexes as well since their values depend on stock prices.

Many people have already heard about "Sell in May and go away" and "Santa Claus Rally". Significantly less people have seen accurate statistics about these yet the following questions are absolutely just:

Do these apply to my specific investment? Are they true for each sector from oil companies to software companies? Are they true from the US to Japan? Is there any other month for my specific investment that performs extremely well or badly? Or only May and December are the ones that are special?

What is a monthly statistics chart good for?

Questions above are easy to answer if we prepare exact statistics for the given stock that contains the following for each month:

Relative frequency of how often the month yielded positive return. (More precisely: how many times did the price change between the starting day and closing days of a month exceed zero?) This may be expressed as a percentage of the total number of occurrence of the month. Average return: average of returns between the starting and closing days of months.

For example: if we have data for three years, and the increase between the first and last days of January in the three years was -1%, 1% and 3%, and the threshold value is 0%, then

the relative frequency of positive return will be 2/3 = 66%, as 1% and 3% are greater, than 0%, and January has passed 3 times. Average increase will be (-1% + 1% + 3%) / 3 = 1%

How to use it?

One may observe on this example chart, that December and October months have often yielded decent returns, while during February the shorting of the equity seemed more deserving.*

It must be noted, that relative frequency values around 50% are of the least importance. (50% relative frequency of increase means that the chance for going up and falling is equal - none of them are more likely than the other.) Months, where the frequency of increase approaches 100% or 0% are more interesting. Forecasting either falling or rising stock prices with a great degree of certainty can be made into money at the stock exchange, in case of either increase, or decrease. (Long position is better in case of 100% and short position in case of 0%.) This can also be utilized for short-term strategies. In case of a longer-term investment, the time of opening a position can be optimized with the help of the chart (e.g.: it is advisable to avoid opening a long-term position in the beginning of a month that most often yields decrease).

Note that an increase near 0% cannot yield positive returns on the stock market, as with the transaction charges, the result would be loss.

There are certain softwares that can eliminate this problem by using a treshold value (eg.: 0.5%) for making statistics. (In these cases increases below 0.5% are not taken as "positive return" when calculating statistics). Chances are better if numbers also look good despite the transactional fees!

*It must be noted however, that past behavior does not represent any guarantee in terms of future performance!

Monthly statistics is not a new idea yet it is extremely useful. You can also prepare it in MS Excel but it takes a lot of effort. It's better to use some specific software.

Managing Employer Stock Positions   What Is a Bond's Yield to Call?   Ever Thought of Being a Trader?   Was It An Anti-Obama Mini-Stock Market Crash, Individual Stocks Down 1 to 2% Across The Board