This is because the portfolio change at the end of June will cause investors who underperform that month to perform worse than in other situations. Once this artificial selling pressure wears off, these stocks are likely to rebound.
It is true that window decoration is a powerful force on multiple occasions throughout the calendar, not just this time of year. It should have the biggest impact in late December, because more investors review their portfolios in early January than in any other month of the year. Therefore, fund managers will do their best to sell their losers before December 12. 31 To avoid the embarrassment of having to report that they were once your property.
The situation is the opposite for the stock acquired by the manager to decorate the facade. These are stocks that have performed well and managers hope to show them in their quarterly end-of-season holding reports. Your apparent purchases will cause these stocks to perform better, which in turn will push them back when the new quarter rolls around.
As expected, January was the worst performing month of the previous month relative to the best performing month of the previous month; This pattern is called the “short-term reversal effect.” The figure below illustrates this, reflecting monthly data from 1926. July is the second strongest month in this pattern. This also makes sense, because after January, July is the next most common time for investors to read their brokerage statements.
As expected, at the end of the first and third quarters, the impact of the quarter-final window decorations was relatively small. In fact, it can be seen from the chart that compared to non-quarterly months, the short-term reversal effect in April is even less.
How to Play a Short-Term Reversal in July
Generally, exchange-traded funds have been created to take advantage of the short-term reversal effect. Vesper U.S. large-cap stock short-term reversal strategy ETF UTRN, “seeking to take advantage of the recent rebound trend of stocks with strong sales recently.”
Since the fund was recently created in September 2018, the average monthly return of the ETF since then only indicates the long-term model . But its average profitability in July (4.1%) was better than any other month.
For those interested in the worst performing stocks in June, I have created the following list. I started with the 50 worst-performing S&P 1500 stocks in June and eliminated any high-yield newsletter recommendations that were not currently monitored by my newsletter performance tracking service.