Sent: 10-07-2012 10:03:04
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End of Month Offers Trading Opportunity
Resources sector investors only need to be in the market for 12 days a year for a superior investment outcome. Importantly, we know which 12 days.
The 1.2% gain in the S&P/ASX 200 share price index last Friday was a reminder of the propensity for the Australian stock market to produce relatively strong end of month share price gains.
Other influences, including hopes that European leaders would come up with a new plan to stabilise their banking system, contributed to Friday's gain. It would be incorrect, consequently, to attribute all end of month price strength to spurious or suspicious trading activities. Nonetheless, the chance of relatively strong share price increases on the last trading day of the calendar month is a feature of Australia's stock market.
This end of month effect is especially noticeable among the smaller resource stocks. On Friday, 160 listed resources companies added 5% or more as the resources component of the small resources index gained 2.1%.
Of the 92 stocks making up the small resources index, the prices of 16 declined on Friday, six were unchanged but the share prices of the remaining 70 stocks increased by between 0.4% and 60.3%. More than a quarter of the stocks making up the index (24) experienced share price movements of 5% or more. Another 20 stocks had share price increases in excess of the 2.3% gain from the S&P/ASX metals and mining index.
Since 2000, the average daily change in the small resources stock price index has been 0.05%, equivalent to an annualised return of 14.2% (with a standard deviation of 25.5% per annum).
The average change in the index on the last trading day of the month over the same period of time was 0.29%, the equivalent of an annualised gain of 109%, some seven times the average daily return.
An investor putting money into the market at the beginning of 2000 and holding to the end of June would have achieved a 10.6% annualised return over twelve and a half years. An investor who had chosen to hold the small resources stocks only on the last day of each month, retaining cash on deposit for the remaining 353 days of the year, would have realised an annualised gain of 8.6%. However, that return would have come with a standard deviation of just 5.1%.
On a risk adjusted basis, the end of month trade represented a tripling of the return from the buy and hold strategy.
The persistence of the end of month effect is surprising in supposedly efficient markets in which more resources are being deployed by regulatory authorities to prevent market manipulation.
Unfortunately, liquidity is a limiting factor in being able to implement a strategy to take advantage of the effect. Opening a position and closing it within a 24 hour trading cycle will be difficult to achieve across a sufficient number of stocks to have a strong chance of capturing the effect. There might be a role here for an exchange traded fund based on the small resources index to help create a more efficient market.
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