Are seasonal effects real, and can we make money from them?
The recent recovery in share prices, following a generally miserable start to the summer, has led some to consider the old stock market adage of "sell in May, and go away; don't come back until St Leger day". (If you don't follow the horses, the St Leger is in early September).
In fact there's a long list of calendar effects that are reputed to act on the market:
- January Effect
- Weekend Effect
- Holiday Effect
- Turn-of-the-Month Effect
... to name but a few.
But are these effects real, predictable, and significant -- in other words, can we make money from them?
While many would automatically dismiss these ideas as superstition, I think it's not inconceivable that some may be valid. Market prices are a function of sentiment, and investors may feel differently about the world on a Monday morning to a Friday afternoon, for example.
The prospect of easy money has led academics to research these effects in their droves, and excruciating reading it makes. In general, their conclusions are a mixture of:
- The effects are real but small, so after costs you'd make a loss;
- The effects were real, but as people heard about them they became arbitraged out;
- The effects appear on some markets some of the time;
- The effects are a myth.
In other words, if you're an investor, don't waste your time. And if you're an academic, find something else to do with your life.
What's important to understand is that if you examine enough effects over enough markets, you will inevitably find some that appear to give some small advantage, just by random chance. Wouldn't it be bizarre if every month had exactly the same historical return? However, it would be dubious to conclude that this data enables us to predict future returns.
As much as I'd love to be able to sit back and make money by just looking at the calendar, I fear this is not going to make my fortune. Last year an American mutual fund was set up with the aim of beating the S&P 500, using -- you've guessed it -- calendar effects. After 18 months, the results for the DirexionPSI Calendar Effects Fund are underwhelming.
For a stock-picker like Maynard Paton, these effects are of little consequence; company-specific factors will always outweigh calendar effects. Maynard's latest recommendation was issued yesterday, and you can check it out now by taking a free 30-day trial of his Champion Shares service. For a limited period only, a full subscription costs only £99.
Money Talk: Stock Markets Myths And Sayings
