Anatomy of $SPY on First Trading Day of the Month - Book Review

May 14, 2014 -

Book Review: Anatomy of $SPY on First Trading Day of the Month


About the Author - Kora Reddy

Most notably, Kora is known for being the co-founder of a quantitative trading portal (paststat.com) which analyzes and backtests stocks listed on the US stock market. Their mission is to provide individual investors or stock trader with stock screening tools that allow you to backtest trading strategies. Using a combination of probabilities and statistics, Kora has been able to create a site loaded with meaningful technical indicators.


What is great about it?
In the book Anatomy of $SPY on the First Trading Day of the Month, Kora explores how buying at the close of the previous day (end of the month) given a number of situations and selling on the close of the first day of the month has played out between January 2000 to October 2013.

Most of us are aware that many money managers and employee retirement funds buy into stocks and mutual funds at the first day of the month. This suggests that there is a positive bias on the first day of the month. But is it always a good idea to buy at the last day of the month and then sell on the close of the first day of the following month?

The book goes through a number of situations whereby it is more advantageous to buy on the close of the end of the month and sell on the close of the first of the month. Kora's research details how the $SPY is affected by moving averages including, but not limited to the 200, 50, 20 and 10. He also considers how the previous day's close whether it be up or down affects the subsequent day's results. As if this were not enough, the book takes it a step further and explains the seasonality on a day by day, month by month, and quarterly basis.

Is it better to buy on the last day of the month and sell on the first day of the following month if it is January versus February? All of this and more is detailed in his book.

Here are some quotes from the book:

"One would have been profitable, in 12 out of 14 years by employing the "go long on $SPY on the first trading day of the month trading strategy" as against the buy and hold approach of $SPY, which was profitable, for 10 out of 14 years."

"First trading day of the month trader was profitable in 3 out of 4 years, when $SPY had negative returns for the year."

What is the not so great about it?

At first glance, this book can be intimidating in the sense that it appears to have a lot statistics. The book does not include backup to test Kora's theories ourselves. However, he does mention that they can be made available through request.

Despite the fact that I've taken a number of statistical courses in college, at first I definitely felt like there were too many percentages and 'T-Test' or 'Payoff Ratio' lingo. Luckily, the book will summarize the statistical findings at the end of each study. For example, in one of the first studies, the author concludes that the $SPY fares better on the close of the first day when the last day of the previous month closed down. These tidbits helped me summarize the statistical tables that were presented.

Furthermore, the book does a fairly decent job of explaining what each of the statistical measures represents and how it is being calculated at the beginning of the book.

One of the best things about the book is that all the "best" strategies with the "first trading day of the month" are summarized at the end of the book. Though this in it in itself may not be enough to be a comprehensive trading strategy, it can provide you with valuable insight that may fit into your own trading plan.

What is your final recommendation?
For the individual investor who is not so much concerned with the day to day happens of the market, Anatomy of $SPY on First Trading Day of the Month provides valuable seasonality statistics that can be used to determine when it is most advantageous to buy into mutual funds or stocks for that matter. This book will definitely give you an edge in that sense. For the more active stock trader, the information in Kora's book is also very beneficial. Based on moving averages you can determine whether or not the probabilities are in your favor to employ the first day of the month trading strategy.

Conclusion: Anatomy of $SPY on First Trading Day of the Month is a recommended read for all traders and will definitely give you an edge to your trading strategy. 
 
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