Mastery of “Monthly Effects”: Big Data Insights into Contrarian Strategies for DJI 30 and NDX 100 Stocks over a Two-Decade Period

Abstract

In contrast to finding better monthly performance shown in a specific month, such as the January effect (i.e., better stock price performance in January as opposed to other months), which has been extensively studied, the goal of this study is to determine whether investors would obtain better subsequent performance as technical trading signals emitted in a specific month because, from the investment perspective, investors purchasing stocks now would not know their performance until later. We contend that our analysis emphasizes its critical role in steering investment decisions and enhancing profitability; nonetheless, this issue appears to be overlooked in the relevant literature. As such, utilizing big data to analyze the constituent stocks of the DJI 30 and NDX 100 indices from 2003 to 2022 (i.e., two-decade data), this study investigates whether trading these stocks as trading signals emitted via contrarian regulation of stochastic oscillator indicators (SOIs) and the relative strength index (RSI) in specific months would result in superior subsequent performance (hereafter referred to as “monthly effects”). This study discovers that the oversold signals generated by these two contrarian regulations in March were associated with higher subsequent performance for holding 100 to 250 trading days (roughly one year) than other months. These findings highlight the importance of the trading time and the superiority of the RSI over SOIs in generating profits. This study sheds light on the significance of oversold trading signals and suggests that the “monthly effect” is crucial for achieving higher returns.

Navigating Energy and Financial Markets: A Review of Technical Analysis Used and Further Investigation from Various Perspectives

“…These patterns can indicate potential trend reversals or continuations, aiding traders in determining optimal entry and exit points. Additionally, technical trading rules, such as the RSI, SOI, and Ma trading rules, are mathematical calculations using historical price data [52][53][54][55], which would help identify over-reaction conditions, confirm trends, or signal reversals, supporting traders in their decision-making process.…”

“…Furthermore, investors may also consider the timing of their trades based on signals from technical trading rules, subsequently assessing performance [29,80]. Different technical trading rules, such as moving average (MA) or relative strength index (RSI) rules, may yield varying performance outcomes depending on when the signals are generated, whether in different quarters [13,19,30] or months [54]. This suggests that certain quarters (or months) may exhibit better subsequent performance than others.…”