1) Defining Window Dressing
Mutual fund managers are required to disclose their portfolios at the end of every qtr.
When the end of the qtr approaches, there is very often excessive buying and selling of stocks to "window dress" the fund's quarterly holdings. Using the SPY as the benchmark, stocks that have outperformed the SPY will more commonly get bought up even more. In contrast, stocks that have underperformed the SPY will more commonly get sold off even more. Thus making the fund's holdings at end of qtr look "really smart!...wow you guys had tons of SPG, and barely any FDO....good work!! etc etc" Statistically, this trend starts around 7-10 trading days before the end of the qtr. Many will say/argue that it also concludes 1-2 days before the end of the qtr, due to the settlement date so they can disclose for their portfolio, etc.
I use Simon Property and Family Dollar as examples, as the trend for this qtr is that the funds will want to ADD to thier SPG and SELL on their FDO.
Fundamentally, I think anyone would would rather be long SPG over FDO is "bonkers". But window dressing is telling us the fund manangers are more likely to want just that, at least till the end of June. Not going to fight the trend. As if that is the case, I will be MORE than happy to short SPG at a higher price, and also more than happy to possibly buy FDO at a lower price at the end of June.
The past 2 qtr's were total disasters for the mutual funds. However, as you can see we had very nice rallies at the end of each of them both. Heck, it was basically the only time the market had a rally for each entire quarter. Which segways into 2)
2) Window dressing also at times applies to allocation (stocks vrs bonds vs money market etc)
If a mutual fund is supposed to be 80% in stocks, and they have been hammered for most of the qtr, so they are down to 75% and fudging it, they know they have to get back to 80% before the end of the qtr comes. So there is going to be buying. In hindsight, this also is a partial explanation to one of the reasons why we had a broad market rally for the end of BOTH the past 2 qtrs, allocation back into stocks.
This qtr however, is very differant. For once, the mutual fund managers are actually drooling to show off their books here. I do not think that they are "underweight" stocks from an allocation standpoint. If anything a strong case can be made they are possibly overweight. Perhaps we see an allocation based broad market SELL OFF at the end of June. It's possible. But that is not the trade that I would look for. I would look for more than 1 favorable trend to jump aboard.
Why settle for 1, when you can have 3?
Q1: So first of all, how do we backtest this?
I do not have massive cumulative statistical calculations for every single out and underperfoming stocks for the final 7-10 days of every qtr, and the few days of the next qtr. I will post a few examples, again only those with >90% institutional ownership and show the results. As with any trade, doing you OWN due dilligence is the key.
Q2: And second of all, how do we track this for THIS qtr?
Use a stock screener, Finviz is pretty good (and free)
a) First only select stocks that are HIGHLY owned by institutions. (I use >90%, which is alot)
(remember, retail traders don't care about qtr window dressing, this is a mutual fund trend. If the stock is not highly owned by the funds, the trend is of lower probability)
b) I also like to filter by only >1,000,000 shares a day avg volume (to rid the low volume plays, just personal preferance)
c) Then to seperate the bull vrs bear plays, I use >50% gain for the QTR for bullish and no gain for the qtr for bearish. (considering how much the broad market is up...having no gain since April 1st is very bearish. I would have select gained <10%,>50% gainers)
14 for bearish (down for the qtr)
Separate them by 2 groups: Out-performers and Under-performers.
The bullish play is to buy the OUT-PERFORMERS roughly 7-10 trading days before qtr end, and sell PRIOR till the last day of the qtr.
The other bullish play is to buy the UNDER-PERFORMERS right at the beginning of the new qtr, or the last day of the existing qtr.
The bearish play is to short the UNDER-PERFORMERS roughly 7-10 trading days before qtr end, and cover PRIOR to the last day of the qtr.
The other bearish play is to short to OVER-PERFORMERS right at the beginning of the new qtr, or the last day of the existing qtr.
Will this make me want to buy or short a stock JUST based on this alone? NO, never.
However, from the results there are stocks that I do know I would be looking to buy as well as ones I would be looking to short. That narrows the list down even more.
Then the final selection of which to play will be chosen based on technicals at that time.
A few of the out-performers that stand out to me that I will be looking to SHORT, but due to Window dressing might likely NOT starting really selling off till JULY. (SPG, ARO, COF, DO, JCP, LM). Especially if they hold up here or even run them up even higher relative to the spy, which would indicate that "Window Dressing" is in full force. Inversely these would also be good to play LONG for the end of June, however by choice I am not looking to play that side as heavy.
A few of the under-performers that stand out that I will be looking to go LONG after July 1st (HOC, BKC, LEAP, FDO), especially if they sell off hard at the end of June, which would indicate "Window Dressing" is in effect". Inversely these would also be good to play SHORT for the end of June, however also by choice I am not looking to play that side as heavy.
As we are not quite at Window dressing time just yet, but getting pretty close so I thought I would blog regarding it.
For me to be safe, untill the qtr is over the only LONGS I will play will be ones that have outperformed SPY since 1 April. As the only SHORTS I will play will be ones that have underperformed SPY since 1 April.
As it can never ever hurt to have yet another trend probability on your side. $$