Objective research to aid investing decisions

Value Investing Strategy (Strategy Overview)

Allocations for December 2022 (Final)
Cash TLT LQD SPY

Momentum Investing Strategy (Strategy Overview)

Allocations for December 2022 (Final)
1st ETF 2nd ETF 3rd ETF

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.

SACEMS, SACEVS and Trading Calendar Updates

We have updated monthly allocations and performance data for the Simple Asset Class ETF Momentum Strategy (SACEMS) and the Simple Asset Class ETF Value Strategy (SACEVS). We have also updated performance data for the Combined Value-Momentum Strategy.

We have updated the Trading Calendar to incorporate data for November 2022.

Reliable U.S. Equity Market Oscillations?

Do annual stock market swing returns swing around their average like a pendulum? In the November update of his 2022 paper entitled “Periodic Structure of Equity Market Annual Returns and Their Predictability”, Daniel Pinelis investigates whether annual returns of the S&P 500 Index and the NASDAQ Composite Index exhibit reliable periodicity. Specifically, he models an oscillator indicator that accumulates directional imbalances in annual stock index returns and applies the indicator, in combination with statistical, graphical and machine learning methods, to estimate extent and timing of further market declines from the current levels. Using annual returns for the S&P 500 Index since the mid-1960s and for the NASDAQ Composite Index since the early 1970s, both through late 2022, he finds that:

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Turn of the Year and Size in U.S. Equities

Is there a reliable and material market capitalization (size) effect among U.S. stocks around the turn-of-the-year (TOTY)? To check, we track cumulative returns from 20 trading days before through 20 trading days after the end of the calendar year for the Russell 2000 Index, the S&P 500 Index and the Dow Jones Industrial Average (DJIA) since the inception of the Russell 2000 Index. We also look at full-month December and January returns for these indexes. Using daily and monthly levels of all three indexes during December 1987 through January 2022 (35 December and 35 January observations), we find that: Keep Reading

Monthly Returns During Presidential and Congressional Election Years

Do hopes and fears of U.S. election outcomes, and associated political machinations, alter the “normal” seasonal variation in monthly stock market returns? To check, we compare average returns and variabilities (standard deviations of returns) by calendar month for the S&P 500 Index during years with and without quadrennial U.S. presidential elections and biennial congressional elections. Using monthly S&P 500 Index closes over the period December 1927 through September 2022 (nearly 95 years), we find that: Keep Reading

Optimal Monthly Cycle for SACEMS?

Is there a best time of the month for measuring momentum within the Simple Asset Class ETF Momentum Strategy (SACEMS)? To investigate, we compare 21 variations of baseline SACEMS by shifting the monthly return calculation cycle from 10 trading days before the end of the month (EOM) to 10 trading days after EOM. For example, an EOM+5 cycle ranks assets based on closing prices five trading days after EOM each month. We focus on gross compound annual growth rate (CAGR) and gross maximum drawdown (MaxDD) as key performance statistics for the Top 1, equally weighted (EW) Top 2 and EW Top 3 portfolios of monthly winners. Using daily dividend-adjusted prices for SACEMS assets during mid-February 2006 through mid-October 2022, we find that:

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Live Test of the Stock Market Overnight Move Effect

Is the stock market overnight move effect exploitable? To investigate, we look at performances of two recently launched exchange-traded funds (ETF) designed to exploit the effect:

  1. NightShares 500 ETF (NSPY), which “seeks to return the night performance of a portfolio of 500 large cap U.S. companies.” The benchmark is SPDR S&P 500 ETF Trust (SPY).
  2. NightShares 2000 ETF (NIWM), which “seeks to return the night performance of a portfolio of 2000 small cap U.S. companies.” The benchmark is iShares Russell 2000 ETF (IWM).

Because available samples are very short, we focus on daily return correlation with the benchmark, average daily return, standard deviation of daily returns and daily reward/risk (average daily return divided by standard deviation of daily returns). We also look at compound annual growth rates (CAGR) and maximum drawdowns (MaxDD) based on daily data. Using daily total returns for NSPY, NIWM and benchmarks during June 28, 2022 through October 7, 2022, we find that: Keep Reading

Stock Market and the National Election Cycle

Some stock market experts cite the year (1, 2, 3 or 4) of the U.S. presidential term cycle as a useful indicator of U.S. stock market returns. Game theory suggests that presidents deliver bad news immediately after being elected and do everything in their power to create good news just before ensuing biennial elections. Are some presidential term cycle years reliably good or bad? If so, do abnormal returns concentrate in certain quarters? Finally, what does the stock market do in the period immediately before and after a national election? Using daily and monthly S&P 500 Index levels from January 1928 through Sep 2022 (about 95 years and 23.7 presidential terms) and focusing on “political quarters” (Feb-Apr, May-Jul, Aug-Oct and Nov-Jan), we find that: Keep Reading

Asset Class ETF Seasonalities?

Do exchange-traded funds (ETF) that track asset classes, such as those used in the Simple Asset Class ETF Momentum Strategy (SACEMS) and the Simple Asset Class ETF Value Strategy (SACEVS), exhibit reliable seasonalities? To check, we look at average return by calendar month for the following nine ETFs:

  • SPDR S&P 500 (SPY)
  • iShares Russell 2000 Index (IWM)
  • iShares MSCI EAFE Index (EFA)
  • iShares MSCI Emerging Markets Index (EEM)
  • iShares Barclays 20+ Year Treasury Bond (TLT)
  • iShares iBoxx $ Investment Grade Corporate Bond (LQD)
  • Vanguard REIT (VNQ)
  • SPDR Gold Shares (GLD)
  • PowerShares DB Commodity Index Tracking (DBC)

Using monthly dividend-adjusted returns for these ETFs over a common sample period during March 2006 (limited by DBC) through August 2022, we find that: Keep Reading

Morning Momentum and Afternoon Reversal for Stock Returns

Do morning and afternoon stock returns convey different meanings due to gradual dissipation of information asymmetry among traders during the trading day (as the market digests overnight news)? In their August 2022 paper entitled “A Tale of One Day: Morning Momentum, Afternoon Reversal”, Haoyu Xu and Xiaoneng Zhu investigate differences in implications for reversal and momentum strategies among morning (9:30AM – 11:30AM), midday (11:30AM – 2:00PM) and afternoon  (2:00PM – 4:00PM). Specifically, they:

  • For each stock each month, cumulate returns over these three intervals.
  • Sort stocks into tenths, or deciles, based either on cumulative returns over the most recent month (for reversal testing) or compounded cumulative returns from 12 months ago to one month ago (for momentum testing) for different combinations of these three intervals.
  • Reform various long-short portfolios using extreme deciles to explore the different predictive powers of past morning and afternoon returns.

For reversal tests, they apply equal weighting. For momentum tests, they consider both value and equal weightings. They calculate raw returns, 3-factor (market, size, book-to-market) alphas and 4-factor (adding momentum) alphas as essential performance statistics. They use conventional strategies using full daily returns as benchmarks. Using intraday and daily return data for a broad sample of U.S. common stocks priced at least $5 during 1993 through 2018, they find that:

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Stock Market Return Reversal after FOMC Announcements

Does the U.S. stock market respond predictably to Federal Open Market Committee (FOMC) announcements, typically released between 14:00 and 14:20 EST? In the August 2022 version of their paper entitled “The FOMC Announcement Reversal”, Tommaso Baglioni and Ruy Ribeiro examine the relationship between pre-FOMC announcement returns and post-FOMC announcement returns. Specifically, they test a reversal strategy that buys (sells) E-mini S&P 500 just before announcement at 13:50 EST when the return during the 24 hours before the announcement is negative (positive) and closes the position at the end of the trading day. They buy at the ask and sell at the bid to account for trading frictions. They compute average cumulative return per round trip transaction and Sharpe ratio as average return divided by standard deviation (standardized to reflect one trading day and the number of hours the position is open). They consider two subperiods (October 1997 through March 2011 and April 2011 through January 2020). They also look at interactions of strategy performance with four measures of economic conditions: market uncertainty (VIX), economic policy uncertainty, monetary policy uncertainty and consumer sentiment. Using intraday E-mini S&P 500 prices, exact FOMC announcement release data and measures of economic conditions on FOMC announcement dates during mid-October 1997 through January 2020 (a total of 180 scheduled FOMC announcements), they find that:

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