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November 30th, 2005 — Issue #303

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Looking at Quarter End

By Nick Kalivas, ManFinancial

It is early to talk about quarter end window dressing, but equity traders will be focused on the issue shortly as year end approaches. It is thought that money is allocated to the market to brighten up portfolios and show ownership of key shares at the end of the quarter. Cynics will state that money is allocated to goose returns so that money managers can improve their bonus or payout. It is also possible that short positions are closed as traders and investors square books. Whatever the reason, let's look at equity market returns around the quarter basis S&P 500 futures (in the near future, I hope to have a report covering the Russell 2000 at year end).

An event study was constructed where equity prices were benchmarked to the last day of the quarter (day 0). Price data over the last 19 quarters was used (back to March 2001). The December 2000 period was excluded because of extreme volatility, which significantly changed the return profile. The bubble period of the late 1990's was also excluded, as the dynamics of the market were very different between the late 1990's and early 2000's. Prices were examined between five days before quarter end (day 5) and five days after quarter end (day-5). The last trading day of the quarter was marked as day 0. The graphic above displays the pattern of prices through the period. Notice that day 0 has a value of 1.0000. During the window of day 5 and day -5, prices tend to make a low about five days before quarter end (day -5) and rise to a peak 1 day after quarter end (day -1). Here are some more exact findings:

On average prices have tended to fall marginally on the last day of the quarter (day 0). Prices rose only 8 of 19 periods between day 1 and day 0 for an average loss of 0.08%. There is no obvious trade.

An event study was constructed where equity prices were benchmarked to the last day of the quarter (day 0). Price data over the last 19 quarters was used (back to March 2001). The December 2000 period was excluded because of extreme On average prices have tended to rise on the first day of the quarter (day -1). Prices rose 10 of 19 periods for an average gain of 0.51%. Activity was more volatile on the first day of the quarter. The average return in the 10 up periods was 1.66%, while the average return in the 9 down periods was -0.77%. Even though the average return is positive, the chance for a winning trade from the long side was only about 50-50%. There is no obvious trade.

On average prices have made a relative low 3 days before quarter end (day 3) and rallied through the day before quarter end (day 1). The market has rise 14 of 19 times or 73.8%. The average return across the period is only 0.24%. Splitting out the return by up and down periods reveals an average gain of 0.79% in the 14 up periods and an average loss of 1.28% in the five down periods. This data point provides some light evidence that the market is biased higher at the end of the quarter.

On average prices have made a relative low three days before quarter end (day 3) and a relative high on the first day of the new quarter (day -1). The market has been up 14 of 19 periods or 73.8%. The average return recorded between day 3 and day -1 is 0.66%. The average return in the 14 up periods was 1.37%, while the average return in the five down periods was -1.34%. It appears that the market sees an influx of money at the turn of the quarter.

In conclusion, there is evidence that the market tends to rise at the turn of the quarter. The gain is subtle and actually starts about three days prior to the last day of the quarter. It is difficult to say that window dressing or quarter end positioning is overly aggressive. Look to profit on quarter end movements buy purchasing S&P 500 futures three days before quarter end (Tuesday, December 27th ) and selling either the day before quarter end (Thursday, December 29th) or the first trading day of 2006 (Tuesday, January 3rd). In recent years, it has not paid to be short the market during this period.

Copyright by ManFinancial (2005). 550 West Jackson Blvd., Chicago, IL 60661. The information contained in this report has been taken from trade and statistical services and other sources, which we believe are reliable. ManFinancial does not guarantee that such information is accurate or complete and it should not be relied upon as such. Any opinions expressed reflect judgments at this date and are subject to change without notice. The principals of ManFinancial and others associated or affiliated with it may recommend or have positions, which may not be consistent with the recommendations made. Each of these persons exercises independent judgment in trading, and readers are urged to exercise their own judgment in trading.

Disclaimer: There is a risk of financial loss in futures and options trading. Futures trading is neither easy nor an easy way to make money. It takes hard work to have success. Please use sound money management when trading futures. Past performance is not necessarily indicative of future results. Nothing in this newsletter is intended to be a trading recommendation for you to buy or sell futures or options. All information has been obtained from sources believed to be reliable, but accuracy is not guaranteed. Readers are solely responsible for how they use the information in this newsletter.

Economic Reports and Expiration Notices

Source: Moore Research Center, Inc.

Date	Reports	Expiration & Notice Dates
12/01 Thu	7:30 AM CST - Personal Income & Personal Spending(Oct) 7:30 AM CST - USDA Weekly Export Sales 7:30 AM CST - Initial Claims-Weekly 9:00 AM CST - Construction Spending(Oct) 9:00 AM CST - ISM Index(Nov) 3:30 PM CST - Money Supply Auto & Truck Sales	FN: Dec Palladium(NYM)
12/02 Fri	7:30 AM CST - Non-farm Payrolls & Unemploy Rate(Nov) 7:30 AM CST - Average Workweek & Hourly Earnings(Nov) 2:00 PM CST - Dairy Products Prices	FN: Dec Heating Oil(NYM) Dec Unleaded Gas(NYM) LT: Dec Live Cattle Options(CME) Jan Cocoa Options(NYBOT)
12/05 Mon	9:00 AM CST - ISM Services(Nov)	FN: Dec Live Cattle(CME)
12/06 Tue	7:30 AM CST - Productivity-Rev(Q3) 9:00 AM CST - Factory Orders(Oct)
12/07 Wed	9:30 AM CST - API & DOE Energy Stats 2:00 PM CST - Consumer Credit(Oct)	LT: Dec Cotton(NYBOT)
12/08 Thu	7:30 AM CST - USDA Weekly Export Sales 7:30 AM CST - Initial Claims-Weekly 3:30 PM CST - Money Supply	LT: Dec Nikkei 225 Options(CME)

* Please note that the information contained in this letter is intended for clients, prospective clients, and audiences who have a basic understanding, familiarity, and interest in the futures markets.

** The material contained in this letter is of opinion only and does not guarantee any profits. These are risky markets and only risk capital should be used. Past performances are not necessarily indicative of future results.

*** This is not a solicitation of any order to buy or sell, but a current market view provided by Cannon Trading Inc. Any statement of facts herein contained are derived from sources believed to be reliable, but are not guaranteed as to accuracy, nor they purport to be complete. No responsibility is assumed with respect to any such statement or with respect to any expression of opinion herein contained. Readers are urged to exercise their own judgment in trading!