Kick off post: Is the End-of-Month Markup a Myth?
Next post: End-of-Month Markup and the Nasdaq 100
And now we will examine the first caveat of the last post, where I noted that survivorship bias may affect performance.
Indeed, the previous test suffered from survivorship bias.
Frank Hassler from Engineering Returns contacted me and generously offered a survivor-free Nasdaq 100 database with which to test this idea. If you haven’t been checking out Frank’s blog, you are missing out on some fresh ideas as well as the code behind them. I mean really, the ideas are money. The fact that the code is also provided is just icing on the cake. Truly, he is one of the good guys in the whole system-trading/backtesting blogosphere.
Understand that Frank’s database replicates the additions and deletions of stocks on the Nasdaq 100 as they would have actually happened in real-time. This is much different from testing over the current 100 stocks of the NDX as many of these 100 stocks would not have belonged to the index earlier in the decade.
Do not underestimate the effect of survivorship bias. Many traders read about it but have no way of actually seeing it or understanding the implications.
What is being fleshed out here is a real-life lesson on the impact of survivorship bias on a trading system.
The Rules:
(Same as before but re-posted for clarity)
- Using the Nasdaq 100, select the 5 stocks with the highest rate-of-change over the last 252 bars (roughly one calendar year) and buy them at the close 5 days before the month’s end. Sell on the close of the 1st day of the next month.
- I’m testing from 1/1/2001 to 10/8/2010. I’ve not included any commissions or slippage.
The Results:
Summary:
Compare the original results without a survivor free database to the results above.
There is quite a difference, and it is due to survivorship bias.
If we were to include commissions, the system would be only marginally profitable, while the original results looked very promising with an annual return of 15.80%.
The good news is that now we can accurately answer Steve Place’s original question- Is the month-end markup on the Nasdaq 100 a myth?
Stay tuned, there is more to come.
Read the next post in this series: Which is the Best Day of the Month to Buy the QQQQ?
I hope you’ll show the same test with the QQQQ’s as a comparison when you get a change.
Thanks,
Also re your earlier comment, how does it work with the losers?
Aristotle, absolutely will run the Qs as a comparison.
And, certainly will use the survivor-free database with the worst ranked to see what happens.
“Is the month-end markup on the Nasdaq 100 a myth?”
I guess the answer would be yes, unless you consider 4% a mark up.