Calendar Effects
The time of year affects human activities and moods, both through natural variations in the environment and through artificial customs and laws. Do such calendar effects systematically and significantly influence investor/trader attention and mood, and thereby equity prices? These blog entries relate to calendar effects in the stock market.
3-Cycle Prediction Engine? July 29, 2011
A reader commented and asked: “Ned Davis Research calculates a time cycle composite. How good is an equal weighting of the annual seasonal cycle, the Presidential term cycle and the the decennial cycle at predicting the direction of the market?” One straightforward way to construct a forecast for a given month by equally weighting historical data at these three frequencies is to use an average of: (1) the average return for the calendar month up through the previous year (2) the average monthly return for the Presidential term year up through the previous Presidential term; and, (3) the average monthly return for the year of a decade up through the previous decade. Even assuming well-behaved distributions of monthly returns, such modeling requires very long sets of historical data (many decades). Using monthly returns for Dow Jones Industrial Average (DJIA), the S&P 500 Index for January 1950 through June 2011 and Shiller’s S&P Composite Index for January 1871 through June 2011, we find that: More…
Combine Long-term SMA, TOTM and Sector Momentum? July 20, 2011
Based on results from “Simple Sector ETF Momentum Strategy Performance”, “Does the Turn-of-the-Month Effect Work for Sectors?” and “Long-term SMA and TOTM Combination Strategy”, a subscriber proposed: “Have you ever thought of combining the three? When SPY is above a long term average, buy the best performing sector ETF using the TOTM strategy.” To investigate, we consider the nine sector exchange-traded funds (ETF) defined by the Select Sector Standard & Poor’s Depository Receipts (SPDR), all of which have trading data back to December 1998:
Materials Select Sector SPDR (XLB)
Energy Select Sector SPDR (XLE)
Financial Select Sector SPDR (XLF)
Industrial Select Sector SPDR (XLI)
Technology Select Sector SPDR (XLK)
Consumer Staples Select Sector SPDR (XLP)
Utilities Select Sector SPDR (XLU)
Health Care Select Sector SPDR (XLV)
Consumer Discretionary Select SPDR (XLY)
We determine sector momentum based on total return over the past six months (6-1). We define bull-bear stock market state according to whether SPDR S&P 500 (SPY) is above-below its 200-day simple moving average (SMA). We define the turn-of-the-month (TOTM) as the eight-trading day interval from the close five trading days before the first trading day of a month to the close on the fourth trading day of the month. Using daily dividend-adjusted closes for the sector ETFs and SPY from 12/22/98 through 7/11/11 (151 months), we find that: More…
Long-term SMA and TOTM Combination Strategy July 20, 2011
Does a strategy combining a long-term simple moving average and the turn of the month beat the market and its components? To investigate, we apply four strategies to S&P Depository Receipts (SPY) as a tradable proxy for the stock market that incorporates portfolio formation costs: (1) buy and hold SPY; (2) invest in SPY (cash) when SPY closes above (below) its 200-day simple moving average ( 200-day SMA); (3) invest in SPY from the close five trading days before through the close four trading days after the last trading day of each month and cash at all other times (TOTM); and, (4) invest in SPY when SPY closes above its 200-day SMA and otherwise use the TOTM strategy (SMA + TOTM). We explore sensitivities of these strategies to a range of trading frictions. Using daily dividend-adjusted closing levels of SPY from inception (1/29/93) through 7/11/11 and contemporaneous three-month Treasury bill (T-bill) yields, we find that: More…
Does the Turn-of-the-Month Effect Work for Sectors? July 18, 2011
A reader inquired whether the Turn-of-the-Month Effect, a concentration of positive stock market returns around the turns of calendar months, works for stock market sectors. To investigate, we measure turn-of-the-month (TOTM) returns for the nine sector exchange-traded funds (ETF) defined by the Select Sector Standard & Poor’s Depository Receipts (SPDR), all of which have trading data back to December 1998:
Materials Select Sector SPDR (XLB)
Energy Select Sector SPDR (XLE)
Financial Select Sector SPDR (XLF)
Industrial Select Sector SPDR (XLI)
Technology Select Sector SPDR (XLK)
Consumer Staples Select Sector SPDR (XLP)
Utilities Select Sector SPDR (XLU)
Health Care Select Sector SPDR (XLV)
Consumer Discretionary Select SPDR (XLY)
In an additional (shorter) test, we add measurement of TOTM returns for SPDR Gold Shares (GLD) as a proxy for gold. We define TOTM as the eight-trading day interval from the close five trading days before the first trading day of a month to the close on the fourth trading day of the month. Using daily dividend-adjusted closes for the sector ETFs and for S&P Depository Receipts (SPY) as a benchmark from 12/22/98 through 7/11/11 (151 months) and for GLD from 11/18/04 through 7/11/11 (80 months), we find that: More…
Turn-of-the-Month Effect Persistence and Robustness July 18, 2011
Is the Turn-of-the-Month (TOTM) effect, a concentration of positive stock market returns around the turns of calendar months, persistent over time and robust to different market conditions. Does it exist for all calendar months? Does it interact with the U.S. political cycle? Does it work for different indexes? To investigate, we define TOTM as the interval from the close five trading days before to the close four trading days after the last trading day of the month (a total of eight trading days, centered on the monthly close). Using daily closes for the S&P 500 Index during February 1950 through July 2011 (738 TOTMs) and for the Russell 2000 Index during October 1987 through July 2011 (286 TOTMs), we find that: More…
Returns Around Earnings Announcements Worldwide July 1, 2011
Do stocks around the world tend to perform better around the time of annual earnings announcements by respective firms than during the rest of the year? In the June 2011 draft of their paper entitled “The Earnings Announcement Premium Around the Globe”, Brad Barber, Emmanuel De George, Reuven Lehavy and Brett Trueman investigate whether the earnings announcement premium (elevated returns during earnings announcement months) is a global phenomenon or is isolated to U.S. stocks. They employ a hedge portfolio, reformed monthly, that is long (short) stocks of firms expected (not expected) to announce annual earnings during the next month, The long and short sides are equal-weighted, and the stocks within each side are value-weighted. Using roughly 200,000 annual earnings announcements for about 28,000 firms in 46 countries during 1990 through 2009 to estimate announcement months during 1991-2010, and associated monthly stock returns, they find that: More…
Stock Market Behavior Around Mid-year and 4th of July June 23, 2011
The middle of the year might be a time for funds to dress their windows and investors to review and revise portfolios. The 4th of July celebration might engender optimism among U.S. investors. Are there any reliable patterns to daily stock market returns around mid-year and the 4th of July? To check, we analyze the historical behavior of the S&P 500 Index from five trading days before through trading days after both the end of June and the the 4th of July. Using daily closing levels of the index for 1950-2010 (61 years), we find that: More…
Kaeppel’s Sector Seasonality Strategy June 22, 2011
A reader suggested looking at the strategy described in “Kaeppel’s Corner: Sector Seasonality” and updated in “Kaeppel’s Corner: Get Me Back, Clarence”. The steps of this calendar-based sector strategy are:
- Buy Fidelity Select Technology (FSPTX) at the October close.
- Switch from FSPTX to Fidelity Select Energy (FSENX) at the January close.
- Switch from FSENX to cash at the May close.
- Switch from cash to Fidelity Select Gold (FSAGX) at the August close.
- Switch from FSAGX to cash at the September close.
- Repeat by switching from cash to FSPTX at the October close.
Does this strategy materially and persistently outperform? To investigate, we compare results for three alternative strategies: (1) Kaeppel’s Sector Seasonality strategy (Sector Seasonality); (2) buy and hold Vanguard 500 Index Investor (VFINX) as an investable broad index benchmark (VFINX); and, (3) a simplified seasonal strategy using only VFINX from the October close through the May close and cash otherwise (VFINX / Cash). Using monthly dividend-adjusted closing levels for FSPTX, FSENX, FSAGX, the 13-week Treasury bill (T-bill) yield as the return on cash and VFINX over the period January 1987 through May 2011 (24+ years), we find that: More…
Post-1960 Financial Cycles May 27, 2011
Are there recognizable country and global financial cycles over the past half century? If so, what are their characteristics? In their April 2011 paper entitled “Financial Cycles: What? How? When?”, Stijn Claessens, Ayhan Kose and Marco Terrones employ regression models to investigate cycles in credit, housing and equity markets for developed countries since 1960. They define a downturn as peak to trough and an upturn as trough to level of previous peak (not trough to new peak). They define series peaks and troughs with the constraints that complete cycle duration must be at least five quarters and each upturn and downturn must be at least two quarters. The main characteristics of cyclical phases are their duration, amplitude and slope, with crunches/busts (booms) defined as downturns (upturns) in the bottom (top) fourth of all observations. They examine pre-globalization (1960-1985) and globalization (1986-2007) subperiods, with phases globally synchronized (highly synchronized) when more than 40% (50%) of countries experience the same phase. Using quarterly data for aggregate loans to the private sector, house/land price indexes and value-weighted stock market indexes for 21 developed countries over the period 1960 through 2007, seasonally adjusted as necessary, they find that: More…
Stock Returns Around Memorial Day May 24, 2011
Does the Memorial Day holiday signal any unusual return effects? By its definition, this holiday brings with it any effects from three-day weekends and sometimes the turn of the month. Prior to 1971, the U.S. celebrated Memorial Day on May 30. Effective in 1971, Memorial Day became the last Monday in May. To investigate the possibility of short-term effects on stock market returns around Memorial Day, we analyze the historical behavior of the stock market during the three trading days before and the three trading days after the holiday. Using daily closing levels of the S&P 500 Index for 1950-2010 (61 observations), we find that: More…
