EOMCS Extension of EOM Stock-Bond Reversal Strategy
Part 3 of Profiting from Predictable Money Flows
This is part 3 of my “Profiting from Predictable Money Flows Series”. Here you will find the previous Parts.
Part 1:
Part 2:
A short recap, the EOMC strategy invests in the early in the month underperformer for the last trading days because there is a reversal effect due to rebalancing by institutional investors. If SPY outperformed TLT in the first 15 trading days, the strategy goes long SPY at the start of next month for 5 trading days.
Part 1 showed that TLT usually performs the worst at the start of the month and tends to perform the best near the end. This means that its returns aren’t evenly spread out over the month but follow a noticeable pattern. Figure 1 illustrates this trend clearly, making it easier to see how TLT’s performance changes from the beginning to the end of each month.
As mentioned earlier, the pattern is easy to spot: performance usually starts off relatively weak at the beginning of the month and becomes noticeably stronger as the month approaches its end.
Hypothesis
Here’s the hypothesis:
The effectiveness of the EOMC strategy can be enhanced by incorporating a short position in TLT during the first five trading days of the month, a period in which the instrument has historically exhibited relative weakness.
Testing the Theory
To test the hypothesis, the analysis uses two liquid ETFs:
SPY – S&P 500 ETF as a proxy for equities
TLT – 20+ Year U.S. Treasury ETF as a proxy for bonds
A typical month includes 20–23 trading days. The strategy examines performance during:
First 15 trading days → to identify the outperformer
Final 5–8 trading days → to capture potential reversal from rebalancing
First 5 trading days next month→ to capture potential continuation / reversal effects
Trading Setup
The execution of the strategy is refreshingly simple:
Around the 15th trading day, determine which asset outperformed since the start of the month.
Position for reversal:
If SPY outperformed TLT, go long TLT.
If TLT outperformed SPY, go long SPY.
Hold until month-end, then close the position.
If SPY outperformed TLT in the first 15 trading days, go long SPY at the start of next month.
Go short TLT at the start of next month.
Hold both until trading day no 5, then close the position.
Repeat each month.
As with the EOMC strategy, precise timing isn’t required—and realistically, it isn’t achievable. The approach relies on broader patterns rather than pinpointing exact days.
The Results
In the next figure, you can see how this EOMCS (end of month + continuation + shorting) strategy performs year by year. The idea is straightforward: during the final five trading days, take a long position in the asset that underperformed earlier in the month. Then, if SPY outperformed TLT over the first 15 trading days, switch to a long SPY position for the first five days of the next month. Go short TLT at the start of the next month for 5 trading days.
Across the 20-year sample, the strategy produced a compound annual growth rate (CAGR) of 17.09%, underscoring its ability to generate robust and consistent returns over extended periods. Importantly, it did not experience a single year of negative performance, highlighting the strategy’s resilience in varying market conditions. The post–financial-crisis environment was particularly advantageous, leading to an exceptional gain in 2009. While the results change from year to year, there isn’t a consistent pattern of the returns rising or falling overall.
In reality the performance will be lower because of transaction and borrowing cost.
Figure 3 presents a comparison of the cumulative performance of the EOMC strategy versus SPY, allowing for a straightforward assessment of how the strategy has performed relative to the market benchmark over time.
Prior to 2008, SPY exhibited a similar cumulative performance relative to the EOMC strategy. Following the onset of the post-crisis recovery in 2009, this relationship changed, with the EOMCS strategy demonstrating sustained outperformance over SPY throughout the subsequent period.
The EOMC strategy constitutes a methodological advancement over the original EOM strategy. Empirically, it achieves higher absolute performance, and its Sharpe ratio of 1.29 indicates an improved risk-adjusted return profile. I mentioned a Sharpe ratio of 1.37 in my last post but had the wrong number in mind.
Conclusion
By explicitly incorporating TLT’s persistent early-month weakness through a systematic short position, the strategy captures an additional, repeatable edge to exploit.
Across two decades of data, the EOMCS strategy demonstrates striking consistency. A 17.09% CAGR, coupled with no negative calendar years.
What makes EOMCS particularly compelling is its simplicity.
In short, the EOMCS extension isn’t just a small tactical refinement, it meaningfully strengthens an already effective strategy. For investors willing to embrace a rules-driven approach, this framework provides a robust, data-supported path to capturing those edges month after month.
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Disclaimer
The above article constitutes my or the authors’ personal views and is for entertainment purposes only. It is not to be construed as financial advice in any shape or form. Please do your own research and seek your own advice from a qualified financial advisor. I / The authors may from time to time hold positions in the aforementioned securities consistent with the views and opinions expressed in this article. The information provided in this article is not making promises, or guarantees regarding the accuracy of information supplied, nor that you guarantee for the completeness of the information here. The information in this article is opinion-based and that these opinions do not reflect the ideas, ideologies, or points of view of any organization the authors may be potentially affiliated with. The authors reserve the right to change the content of this blog or the above article. The performance represented is historical and that past performance is not a reliable indicator of future results and investors may not recover the full amount invested.