By Daniel Archibald | CFA
Stock investors are familiar with "Sell in May, and go away" and the "January effect", with historical evidence showing that such anomalies might be valid. Investment theory, and in particular, the efficient market hypothesis, revile against the evidence of such trading patterns, arguing that such anomalies should not exist.
Theorists assert that if everyone expects the market to trade down from May until Halloween, than investors will sell out in March or April instead, so as to not get caught up in the firesales of May. This would naturally bring forward market highs from May to March. They will then start buying in August or September so as to not miss the late-year bounceback, bringing forward the timing of market lows. Markets should be good at trading away anomalous patterns - as long as investors are rational.
But perhaps investors are not rational. Or perhaps there is an air of "self fulfilling prophecies" helping to perpetuate such market behaviour. The persistence of the following calendar anomalies lend weight to such conclusions:
- January Effect - The perceived outperformance of equities in January could be due to a few things: New Year frivolity, end-of-year bonuses, tax loss harvesting, the weather, etc.
- Halloween Indicator - This is the flip-side of "Sell in May and Go Away" in which stocks are thought to outperform from November to April, and underperform from May to October
- Monday Effect - There is likely to be psychological reasons for why equities seem to outperform on Fridays and underperform on Mondays. Or maybe its because companies and politicians like to reveal bad news on the weekend, when people aren't as focussed on the news.
- Country-Specific - Different countries have different weather, different tax years, and different celebratory seasons. These could mean that different markets might have different calendar anomalies. For example, there is evidence that the Indian market outperforms from June to Christmas, which is almost opposite to the Halloween indicator.
- October Effect - The month of doom for stock markets is supposed to be more volatile and prone to crashes. This is likely to be more to do with superstition than anything else.
Or, as Mark Twain put it: "October. This is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August, and February."