When is the best time to buy the FTSE?
We study the distribution of annual peaks and bottoms of the blue-chip FTSE 100 index and find prices show positive momentum into the year-end. Trading day #249 (5th September) of each year rallies 80% of the time and maybe the best time to buy the FTSE.
Over the last 36 years (1984-2020), the FTSE 100 Index of leading UK companies rose about 5.2 times, from 1,000 to 6,240. At a glance, this return – excluding dividends – seem significant. But a quick calculation of its corresponding Compound Annual Growth Rate (CAGR) yields a more respectable return over the three and a half decade – at 5.16%. (Read here on CAGR)
It is a good – but not a great return. And it is easy to see why. Looking at FTSE’s chart, today’s figure of 6,240 is no higher than it was back in 2000, twenty years ago. Arguably, the exclusion of dividends lowers the final return for investors. However, bear in mind that few investors can afford to compound these dividends over such a long time. Investors tend to be impatient.
No wonder many investors are unhappy with the ‘buy and hold’ strategy. They want to squeeze more returns out of the UK stock market. They buy into growth stocks. They stampede into ‘fads’. And they use market timing. Every edge is to be utilised. ‘Is there a good day,’ investors often wonder, ‘to buy stocks every year?’
The distribution of peaks and troughs of FTSE 100
To answer this question the first step is to look at past annual peaks and troughs.
To this end, we splice the FTSE 100 index by year and rebase the data to zero the start of each year. This new dataset is then plotted below. Each grey line represents one calendar year. All are grey except for the last two years. The red line is the rebased series from 2019, while the blue line is the current year.
Just looking at this chart, 2020 is shaping up to be a very unusual year.
Share prices collapsed in March when the country lumbered into a total societal lockdown caused by the coronavirus pandemic. Seldom has the index fallen so far, so early in the year. Down 35% after only 55 days of trading, and after 100 days of trading, the index is still trading at a level far below previous years at the same period.
Next, we look at the peak and trough of each rebased series. I marked the peak of each rebased data on the chart as a green dot and the bottom as a red dot. Some interesting patterns emerged on this chart.
Pattern 1: There is a crowding of green dots (peaks) at the end. This means that the UK stock market habitually ends the year on the high. The ‘Santa Rally’ is real. There are some peaks scattered throughout the year. But the index tends to ramp higher into the new year.
For troughs, there are also some crowding at the beginning of the year, but the concentration is not as pronounced as the peak. The red dots, more or less, spread out throughout the year.
Pattern 2: The existence of upper and lower boundaries. Seldom did the index venture above 40% on the bull side and 40% on the down side.
Throughout the last three decades, only once did the FTSE 100 Index plunge below 40% and twice it breached the 40% barrier – and only for a brief period. This suggests that reversionary – that is, contrarian – strategies must be considered when the index trends strongly in either direction.
Armed with this info, are we closer to answering how do we buy near the lowest of the year? One possibility is to look at how the index bottomed out throughout the years.
In the chart below, I extract all the bottoms of the year and its preceding 10-day trend before these lows are attained.
Pattern 3: Before bottoming out for the year, the index typically corrects about 5-10% in the preceding days. There were, however, many cases when the index dropped less than 5% before the bears were checked. These instances occurred in the early days of a trading year.
Using the same data above, I aligned all the trading days together. For example, I grouped all the returns for each trading day (e.g., Day 2) from all years (1984-’20) and count the percentage where returns are positive. This is done from Day 1 to Day 258, and plotted in a bar chart below.
Again, the pattern we saw in Chart 3 is repeated here. The percentage of positive days generally rises into the year end. This turn-of-year effect is probably due to renewed optimism about the coming year.
This may be the best day to buy the FTSE…
Day 249 (5th September), for example, is the closest you get to a ‘buy day’- as 81% of the time the prices exhibit a positive return on that particular trading day of the year. In other words, you would want to buy on Day 248 and hold for one trading day.
There are some other days when the percentage is high, such as Day 124 of each year when the percentage hit 78.4%. But these high percentage days are seemingly quite random.