The Stock Trader’s Almanac observes that seasonally for the last few decades, Dow has been up on the Monday before the expiration Friday in October. During the last 32 years, Dow Jones Industrial Average had been up 26 times for a success rate of 81.25%.
Such a success rate augurs well for developing a trading strategy based upon this seasonal trend. This seasonal tendency also impacts S&P 500, NASDAQ and Russell 2000.
Based upon the original Almanac seasonal trend the strategy calls for going long on the Friday close before the Monday that precedes the expiration week in October and exiting on Monday close – holding the trade for one trading day (three calendar days). Using ETFs – DIA for Dow, SPY for S&P, QQQ for NASDAQ and IWM for Russell 2K – we get following results:
| ETF | # of Trades | Win % | Avg. | Avg. Win | Avg. Loss | Avg W / Avg L | Avg Cal Days | Annualized |
| QQQ | 13 | 77% | 1.1% | 1.7% | (0.9)% | 2.91 | 3 | 137% |
| DIA | 14 | 64% | 1.0% | 1.9% | (0.6)% | 3.04 | 3 | 123% |
| SPY | 19 | 63% | 0.8% | 1.5% | (0.6)% | 2.54 | 3 | 97% |
| IWM | 12 | 83% | 0.8% | 1.3% | (2.0)% | 0.68 | 1 | 108% |
The annualized rate is computed based upon the average return for average days held.
We can improve the performance of this strategy by modifying entry.
Entry Filter: Go long on the Thursday close before the Monday that precedes the expiration Friday in October.
Exit Filter: Same exit rule – On Monday close
These rules improve the overall result.
| ETF | # of Trades | Win % | Avg. | Avg. Win | Avg. Loss | Avg W / Avg L | Avg Cal Days | Annualized |
| QQQ | 13 | 85% | 2.6% | 3.2% | (1.1)% | 2.92 | 4 | 234% |
| DIA | 14 | 71% | 1.8% | 2.7% | (0.4)% | 5.98 | 4 | 161% |
| SPY | 19 | 68% | 1.5% | 2.4% | (0.3)% | 7.44 | 4 | 141% |
| IWM | 12 | 75% | 2.2% | 3.2% | (0.7)% | 4.39 | 4 | 205% |
Here is the list of trades using the modified strategy:
| # | ETF | Entry Date | Entry | Exit Date | Exit | Return |
| 1 | SPY | 7-Oct-93 | 45.75 | 11-Oct-93 | 45.91 | 0.3% |
| 2 | SPY | 13-Oct-94 | 46.59 | 17-Oct-94 | 46.72 | 0.3% |
| 3 | SPY | 12-Oct-95 | 58.13 | 16-Oct-95 | 58.03 | (0.2)% |
| 4 | SPY | 10-Oct-96 | 69.13 | 14-Oct-96 | 70.00 | 1.3% |
| 5 | SPY | 9-Oct-97 | 96.64 | 13-Oct-97 | 96.45 | (0.2)% |
| 6 | Dow | 8-Oct-98 | 77.31 | 12-Oct-98 | 79.78 | 3.2% |
| 7 | SPY | 8-Oct-98 | 96.08 | 12-Oct-98 | 99.43 | 3.5% |
| 8 | Dow | 7-Oct-99 | 105.27 | 11-Oct-99 | 106.38 | 1.1% |
| 9 | QQQ | 7-Oct-99 | 63.09 | 11-Oct-99 | 64.66 | 2.5% |
| 10 | SPY | 7-Oct-99 | 131.17 | 11-Oct-99 | 132.94 | 1.3% |
| 11 | Dow | 12-Oct-00 | 100.38 | 16-Oct-00 | 102.70 | 2.3% |
| 12 | IWM | 12-Oct-00 | 45.97 | 16-Oct-00 | 48.13 | 4.7% |
| 13 | QQQ | 12-Oct-00 | 75.13 | 16-Oct-00 | 82.00 | 9.1% |
| 14 | SPY | 12-Oct-00 | 132.41 | 16-Oct-00 | 137.45 | 3.8% |
| 15 | Dow | 11-Oct-01 | 94.20 | 15-Oct-01 | 93.57 | (0.7)% |
| 16 | IWM | 11-Oct-01 | 42.68 | 15-Oct-01 | 42.70 | 0.0% |
| 17 | QQQ | 11-Oct-01 | 34.70 | 15-Oct-01 | 34.40 | (0.9)% |
| 18 | SPY | 11-Oct-01 | 109.41 | 15-Oct-01 | 108.72 | (0.6)% |
| 19 | Dow | 10-Oct-02 | 75.42 | 14-Oct-02 | 78.94 | 4.7% |
| 20 | IWM | 10-Oct-02 | 33.50 | 14-Oct-02 | 34.58 | 3.2% |
| 21 | QQQ | 10-Oct-02 | 21.08 | 14-Oct-02 | 22.48 | 6.6% |
| 22 | SPY | 10-Oct-02 | 80.20 | 14-Oct-02 | 84.18 | 5.0% |
| 23 | Dow | 9-Oct-03 | 97.14 | 13-Oct-03 | 97.90 | 0.8% |
| 24 | IWM | 9-Oct-03 | 51.98 | 13-Oct-03 | 52.73 | 1.4% |
| 25 | QQQ | 9-Oct-03 | 34.69 | 13-Oct-03 | 35.24 | 1.6% |
| 26 | SPY | 9-Oct-03 | 103.72 | 13-Oct-03 | 104.34 | 0.6% |
| 27 | Dow | 7-Oct-04 | 101.44 | 11-Oct-04 | 101.14 | (0.3)% |
| 28 | IWM | 7-Oct-04 | 58.03 | 11-Oct-04 | 57.57 | (0.8)% |
| 29 | QQQ | 7-Oct-04 | 36.24 | 11-Oct-04 | 35.75 | (1.4)% |
| 30 | SPY | 7-Oct-04 | 112.84 | 11-Oct-04 | 112.37 | (0.4)% |
| 31 | Dow | 13-Oct-05 | 101.96 | 17-Oct-05 | 103.50 | 1.5% |
| 32 | IWM | 13-Oct-05 | 61.87 | 17-Oct-05 | 63.02 | 1.9% |
| 33 | QQQ | 13-Oct-05 | 37.78 | 17-Oct-05 | 38.18 | 1.1% |
| 34 | SPY | 13-Oct-05 | 116.80 | 17-Oct-05 | 118.47 | 1.4% |
| 35 | Dow | 12-Oct-06 | 119.46 | 16-Oct-06 | 119.77 | 0.3% |
| 36 | IWM | 12-Oct-06 | 75.30 | 16-Oct-06 | 76.35 | 1.4% |
| 37 | QQQ | 12-Oct-06 | 42.23 | 16-Oct-06 | 42.45 | 0.5% |
| 38 | SPY | 12-Oct-06 | 136.28 | 16-Oct-06 | 136.84 | 0.4% |
| 39 | Dow | 11-Oct-07 | 140.21 | 15-Oct-07 | 140.02 | (0.1)% |
| 40 | IWM | 11-Oct-07 | 83.30 | 15-Oct-07 | 83.05 | (0.3)% |
| 41 | QQQ | 11-Oct-07 | 52.66 | 15-Oct-07 | 53.12 | 0.9% |
| 42 | SPY | 11-Oct-07 | 155.47 | 15-Oct-07 | 155.01 | (0.3)% |
| 43 | Dow | 9-Oct-08 | 85.55 | 13-Oct-08 | 95.03 | 11.1% |
| 44 | IWM | 9-Oct-08 | 49.99 | 13-Oct-08 | 56.98 | 14.0% |
| 45 | QQQ | 9-Oct-08 | 31.52 | 13-Oct-08 | 35.13 | 11.5% |
| 46 | SPY | 9-Oct-08 | 90.70 | 13-Oct-08 | 101.35 | 11.7% |
| 47 | Dow | 8-Oct-09 | 97.91 | 12-Oct-09 | 98.94 | 1.1% |
| 48 | IWM | 8-Oct-09 | 60.71 | 12-Oct-09 | 61.43 | 1.2% |
| 49 | QQQ | 8-Oct-09 | 42.24 | 12-Oct-09 | 42.57 | 0.8% |
| 50 | SPY | 8-Oct-09 | 106.61 | 12-Oct-09 | 107.68 | 1.0% |
| 51 | Dow | 7-Oct-10 | 109.60 | 11-Oct-10 | 110.26 | 0.6% |
| 52 | IWM | 7-Oct-10 | 68.41 | 11-Oct-10 | 69.34 | 1.4% |
| 53 | QQQ | 7-Oct-10 | 49.41 | 11-Oct-10 | 49.77 | 0.7% |
| 54 | SPY | 7-Oct-10 | 115.89 | 11-Oct-10 | 116.65 | 0.7% |
| 55 | Dow | 13-Oct-11 | 114.66 | 17-Oct-11 | 113.90 | (0.7)% |
| 56 | IWM | 13-Oct-11 | 69.76 | 17-Oct-11 | 68.98 | (1.1)% |
| 57 | QQQ | 13-Oct-11 | 57.12 | 17-Oct-11 | 57.28 | 0.3% |
| 58 | SPY | 13-Oct-11 | 120.51 | 17-Oct-11 | 120.23 | (0.2)% |
| 59 | DIA | 11-Oct-12 | 133.13 | 15-Oct-12 | 134.02 | 0.7% |
| 60 | SPY | 11-Oct-12 | 143.36 | 15-Oct-12 | 144.02 | 0.5% |
| 61 | QQQ | 11-Oct-12 | 66.71 | 15-Oct-12 | 67.17 | 0.7% |
| 62 | IWM | 11-Oct-12 | 82.77 | 15-Oct-12 | 82.64 | (0.2)% |
The overall win percentage of the strategy is 74%.
The average return in 1.9%.
The average win to average loss ratio is 5.22.
The average hold period is 4 calendar days and the annualized return in 170.9%.
Since 1993, the strategy had five losing years. In 1995 and 1997, only SPY was traded with a loss of (0.2)% each year. The 2001 was down by (0.5)%, 2004 by (0.7)% and 2011 was down by (0.4)%. 2007 was a break even year.
Instead of 1X ETFs, one can also use ultra ETFs (2X or 3X). Using 2X ETFs, DDM for Dow, SSO for S&P, QLD for NASDAQ and UWM for Russell 2k, will double the return but will also increase the risk.
Update: The year 2012 also turned out to be a positive one for this trend. Dow, S&P 5oo and NASDAQ were a positive between the Thursday and Monday before the expiration Friday. Russell 2000 was not.
The Fine Print: Before employing this strategy in your live account please understand the rationale behind this seasonality pattern. Then run some back tests for the trade start-date and holding periods. Make sure that the risk level, max draw down, win ratio and average loss falls within your comfort zone and that you can withstand the draw down and the associated risk. Also read our disclaimer.
