Top performing stocks could benefit from window dressing heading into the last week of the quarter
Here is some valuable information if you’re looking for very short-term stock or option plays. This week, I’m talking about window dressing. Each quarter, big funds report their stock holdings. Window dressing is when portfolio managers purchase the hottest stocks just before the reporting date, often the end of the quarter. When potential investors look into their holdings, window dressing can fool them into thinking the fund manager used foresight to invest in these high-flying stocks. Similarly, these funds might unload losing stocks at the end of the quarter, so investors do not see these bad bets in their holdings.
In the article below, I look for evidence of window dressing and list stocks that might benefit or suffer from the practice in this final week of the second quarter.
Evidence of Window Dressing
If window dressing occurs, then you would expect the high-flying stocks to do well in the last week of the quarter. Using current S&P 500 Index (SPX) stocks, I found the 50 best and worst stocks in the six months leading to the quarter’s end. Then, I summarized their returns in the final week of the quarter based on whether they were among the best performers, worst performers, or in the middle.
The table below provides evidence of window dressing. The top row shows data on stocks that were doing the best heading into the final week of the quarter, going back to 2012. Those stocks averaged a small gain in the last week, with just over half positive. Of these stocks, 55% beat the SPX in the final week. Stocks that were doing the worst heading into the final week averaged a loss of 0.18%, with only 47% ending higher.
Second and Third Quarters See More Window Dressing
Using the same method as above, the data below is broken down by quarter. The first table shows the average return of the stocks in the final week of the quarter.
Window dressing looks non-existent in the first and fourth quarters. Perhaps other forces are at work in these quarters. Buying and selling for tax purposes might be more important at the end of the year (fourth quarter) or just ahead of the April tax deadline (first quarter).
The second and third quarters show clear evidence of window dressing. By the two measures below, the best performers heading into the final week also do the best in the final week. Similarly, the worst performers heading into the final week do the worst in the final week. Short-term traders may want to consider window dressing at the end of June and September.
Stocks to Watch In the Next Week
Based on the analysis above, below are two lists of stocks to watch as the second quarter draws to a close. The first table shows SPX stocks that have done the best over the past six months. The window dressing theory says these stocks should do well in the final stretch of the quarter. The second table of stocks names the worst performers over the past six months. These stocks could face selling pressure over the next week, as portfolio managers unload them before the end of the quarter.
