Academic discussions of stock markets frequently reference The Efficient Markets Hypothesis
; an idea that share prices are fairly valued, their prices reflecting all available information. However folklore such as "Sell in May and go away"
, which proved prudent in 2007, clashes with this theory.
The history of the equity markets is long, and like any discipline with a rich history there is a deep trove of lore and near superstition adhered to by many market participants. But sometimes such folk tales are true.
For example, The Weekend Effect
, documents negative a correlation between Friday and Monday returns. Some believe the Weekend Effect is driven by short sellers
purchasing shares Friday afternoon to close open positions. But others speculate this is caused by the corporate practice of "burying" bad news
by releasing it on Friday afternoons after
the markets are closed, thus leading to a Monday morning sell off. Regardless of the cause, The Weekend Effect has been observed in most G20 stock markets, and in some cases for almost a century. Schwert (2002) looked at The Weekend Effect in detail
While there are other market phenomenon linked to days of the week, we also see large number of what are called "calendar effect"
anomalies. These tend to be observed at or during specific times of the year, and once again cut across national and cultural boundaries.
Consider The January Effect
, which refers to the tendency of the equity markets annual
returns to follow the results of the first five trading days
in January. In other words, if the market finishes the first
week of the year on a positive note, so will the entire
year and vice versa. Haug & Hirschey (2006) conducted a very detailed analysis
[.pdf] of the January Effect.
Lest one think stock traders are cold hearted capitalists, The Santa Claus Effect
gives all good (actually only the longs) equity market participants a present in December in the form of an end of year rally and higher share prices
. Some, however, believe this effect reflects nothing more than end of year buying as tax exempt vehicles (e.g., an IRA) are capitalised, or bonuses are received and invested.
Halloween brings seasonal market advise
- "Sell in May and go Away but buy back on St. Leger Day"
. A phenomenon that not only has been observed globally but also documented in England since 1694
. Adherents believe in liquidating share holdings each May, not re-entering the market until "St. Leger Day", a date in late September which refers to the running of a horse race at Doncaster in England
. Jacobsen & Bouman (2001) studied this effect globally
So how about 2008? Well many will easily recall last summers carnage
, with The Dow, the S&P500 and the NASDAQ all losing hundred of millions of dollars of shareholder wealth under much more benign economic conditions.
With the S&P 500 at a relatively low price to earnings ratio
, The Fed pushing rates down to 2%
, commodity prices trending higher
, the housing market sharply down
, the American economy slowing
and the US Dollar trading at record lows - the summer of 2008 as well as the autumn will no doubt prove very interesting.
Complete citations to papers referenced
Haug, M., Hirschey, M., 2006, 'The January Effect', Financial Analysts Journal
, Vol 62, No 5
Jacobsen, B. , Bouman, S., 2001, 'The Halloween Indicator, Sell in May and Go Away: Another Puzzle', Massey University Working Paper
Schwert, G., W., 2002. Anomalies and Market Efficiency, Handbook of the Economics of Finance
, pages 937-972