Monday, March 31, 2008

What Are The Chances The Market Gets "Marked Up?"

As we near the end of the quarter I’ve begun to hear quite a bit about the “end-of-quarter markup” phenomenon. I’ve also received a few questions about it. The theory is that mutual funds and other large institutions tend to “mark up” the prices of securities at the end of each quarter so that their return numbers look better. I decided to take a look.

First I ran a test which showed the return of the S&P 500 on the last day of each quarter going back to 1960. Of the 186 quarter-ends over the period, 90 have had a positive last day of quarter, 94 finished negative, and 2 were basically dead even. The average win was 0.065%. The average loss was 0.06%. The net average day was 0.001%. Not even as good as an average day over the period.

I then checked to see what happened if the market sold off the few days leading up to the last day of the quarter (like now). For instance, 7 times the market sold off at least 2.5% in the last 3 days of the month. Five saw gains on the last day and two saw more losses. Unfortunately, the losses nearly eclipsed the gains. Lowering the requirement to a 1.5% selloff in the preceding 3 days gave 18 trades. 9 winners and 9 losers. Net expectancy was slightly negative.

I then looked at what happened if the S&P was down at least 3 days in a row just before the last day of the quarter. Twenty occurrences. 10 winners. 10 losers. Slight negative expectancy.

Looking at recent history rather than all the way back to 1960 did not help these studies.

No matter how I looked I was not able to find any evidence of an end of quarter mark-up in the index. Perhaps mark-ups occur in individual securities, but it’s not apparent in the general market.

Since I figured some people might be getting sick of looking at those “Myth Buster” guys, I posted some other Busters today…

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EOQ Markup - $12.00


Jeff said...

Rob, here is a similar study, but the conclusions are that there is an end of quarter mark-up phenonmenon. I may have dreamed this, but I think you used to write for these guys?

Jeff said...

Whoops, I read too fast. They tested individual securities, and you tested the index.

Still, it seems illogical that there is an edge with individual securities but not with the indexes?

Rob Hanna said...

Woodshedder -

Yes. I did used to write for TM.

You're right. The studies do seem to be a bit at odds with each other. I had read theirs a while ago and was surpised by my own results. A few differences:

1) As you mentioned - indvidual stocks vs. the index.
2) I just looked at the last day. I believe they looked at the last few days.

Perhaps there is a bit of a surviorship bias at work. The best stocks get marked up. The worst get sold. The worst eventaully go out of business and are not in the TM database for their historical study. That may account for some of the difference.


Anonymous said...

The consensus view about “window dressing” is that long only managers –namely mutual funds- chase the quarter’s hot performers, adding names to their holdings for the reporting period. Since the industry standard for mutual funds is T+1 reporting, the day to examine is the SECOND to last day of the quarter. Stocks purchased on the last day of the quarter would NOT show up on portfolio statements.

I wonder how examining the second to last day of the quarter, rather than the last would change your findings.

-Eric L.