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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.

Stock Market Continuation and Reversal Months?

Are some calendar months more likely to exhibit stock market continuation or reversal than others, perhaps due to seasonal or fund reporting effects? In other words, is intrinsic (times series or absolute) momentum an artifact of some months or all months? To investigate, we relate U.S. stock index returns for each calendar month to those for the preceding 3, 6 and 12 months. Using monthly closes of the S&P 500 Index since December 1949 (using the January 1950 open) and the Russell 2000 Index since September 1987, both through April 2018, we find that: Keep Reading

Unique U.S Equity ETF Seasonalities?

Do exchange-traded funds (ETF) exhibit unique calendar-based anomalies? In their April 2018 paper entitled “Evidence of Idiosyncratic Seasonality in ETFs Performance”, flagged by a subscriber, Carlos Francisco Alves and Duarte André de Castro Reis investigate calendar-based patterns of risk-adjusted returns and tracking errors for U.S. equity ETFs and compare findings to those of underlying indexes. They aggregate returns of their ETF sample via equal weighting. They consider returns calculated based on either market price or Net Asset Value (NAV). For risk adjustment, they consider alpha from either 1-factor (market) or 4-factor (market, size, book-to-market, momentum) risk models of stock returns. They look for raw return or alpha patterns in calendar months, calendar quarters, months of calendar quarters, calendar half-years, days before holidays (New Year’s Day, Martin Luther King Jr. Day, George Washington’s Birthday, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving and Christmas), days of the week and turn-of-the-month (last trading day of a month through three trading days of the next month). Using daily prices and NAVs for 148 index-tracking U.S. equity ETFs and associated indexes, and contemporaneous equity factor model returns, during December 2004 through December 2015 (11 years), they find that:

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SACEVS and SACEMS Performance by Calendar Month

A subscriber asked whether the Simple Asset Class ETF Momentum Strategy (SACEMS) exhibits monthly calendar effects. In investigating, we consider also the Simple Asset Class ETF Value Strategy (SACEVS)? We focus on: (1) the “Best Value” version of SACEVS, which each month picks one of three exchange-traded funds (ETF) corresponding to the most undervalued of U.S. term, credit and equity risk premiums (or cash if none of the three premiums are undervalued); and, (2) the “EW Top 3” version of SACEMS, which each month equally weights the top three of nine ETFs/cash with the highest total returns over a specified lookback interval. Using monthly total returns for SACEVS Best Value asset selections since August 2002 and for SACEMS EW Top 3 asset selections since August 2006, all through March 2018, we find that:

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January Barometer Over the Long Run

Does long term data support the belief that “as goes January, so goes the rest of the year” (January is the barometer) for the the U.S. stock market? Robert Shiller’s long run sample, which calculates monthly levels of the S&P Composite Stock Index since 1871 as average daily closes during calendar months, offers data for testing. Because average monthly levels differ from monthly closes, we run all tests also on the S&P 500 Index. Using monthly levels of the S&P Composite Stock Index for 1871-2017 (147 years) and monthly and daily closes of the S&P 500 Index for 1950-2017 (68 years), we find that: Keep Reading

Aggregate Firm Events as a Stock Return Anomaly

Should investors view stock returns around recurring firm events in aggregate as an exploitable anomaly? In their October 2017 paper entitled “Recurring Firm Events and Predictable Returns: The Within-Firm Time-Series”, Samuel Hartzmark and David Solomon review the body of research on relationships between recurring firm events and future stock returns. They classify events as predictable (1) releases of information or (2) corporate distributions, with some overlap. Information releases include earnings announcements, dividend announcements, earnings seasonality and predictable increases in dividends. Corporate distributions cover dividend ex-days, stock splits and stock dividends. They specify a general trading strategy to exploit these events that is long (short) stocks of applicable firms during months with (without) predictable events. They use market capitalization weighting but, since there are often more stocks in the short side, they scale short side weights downward so that overall long and short sides are equal in dollar value. Based on the body of research and updated analyses based on firm event data and associated stock prices from initial availabilities through December 2016, they conclude that:

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Effects of Execution Delay on SACEVS

How does execution delay affect the performance of the Best Value and Weighted versions of the “Simple Asset Class ETF Value Strategy” (SACEVS)? These strategies each month allocate funds to the following asset class exchange-traded funds (ETF) according to valuations of term, credit and equity risk premiums, or to cash if no premiums are undervalued:

3-month Treasury bills (Cash)
iShares 20+ Year Treasury Bond (TLT)
iShares iBoxx $ Investment Grade Corporate Bond (LQD)
SPDR S&P 500 (SPY)

To investigate, we compare 21 variations of each strategy with execution days ranging from end-of-month (EOM) per the baseline strategy to 20 trading days after EOM (EOM+20). For example, an EOM+5 variation computes allocations baed on EOM but delays execution until the close five trading days after EOM. We focus on gross compound annual growth rate (CAGR) and gross maximum drawdown (MaxDD) as key performance statistics. Using daily dividend-adjusted closes for the above ETFs from late July 2002 through mid-September 2017, we find that:

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SPY by Day of Week and Overnight

Does the broad U.S. stock market, as represented by SPDR S&P 500 (SPY), exhibit reliable day-of-the-week and/or overnight return anomalies? To check, we consider three returns:

  • Close-Open: measured from prior close to open. (For example, the Monday Close-Open return is from the close on the prior trading day, usually Friday, to the open on Monday.)
  • Open-Close: measured from open to close.
  • Close-Close: measured from prior close to close.

We calculate these returns overall, by day of the week and by the number of calendar days since the prior close (for example, three days for a normal weekend). Using daily opening and closing prices for SPY during end of January 1993 through most of August 2017 (6,188 days), we find that: Keep Reading

VXX and XIV Returns by Day of the Week

Do the returns of iPath S&P 500 VIX Short-term Futures ETN (VXX) and VelocityShares Daily Inverse VIX Short-term ETN (XIV) vary systematically across days of the week? To investigate, we look at daily close-to-open, open-to-close and close-to-close returns for both. Using daily split-adjusted opening and closing prices for VXX during February 2009 through July 2017 and for XIV during December 2010 through July 2017, we find that:

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Optimal Rebalancing Frequency/Months?

Is there a preferred frequency and are there preferred months for rebalancing conventional asset class portfolio holdings? To investigate we consider annual, semiannual and quarterly rebalancing of a simple portfolio targeting a 60-40 stocks-bonds mix. We consider all possible combinations of calendar month ends as rebalancing points. We ignore rebalancing (and dividend-reinvestment) frictions and tax implications, thereby giving an advantage to frequent rebalancing. We focus on compound annual growth rate (CAGR) as the critical portfolio performance metric. Using dividend-adjusted monthly closes for SPDR S&P 500 (SPY) to represent stocks and Vanguard Total Bond Market Index (VBMFX) to represent bonds over the period January 1993 (SPY inception) through June 2017 (about 24 years), we find that: Keep Reading

Kaeppel’s Sector Seasonality Strategy

A reader suggested looking at the strategy described in “Kaeppel’s Corner: Sector Seasonality” (from November 2005, link no longer in place) and updated in “Kaeppel’s Corner: Get Me Back, Clarence” (from October 2007, link no longer in place). The steps of this calendar-based sector strategy are:

  1. Buy Fidelity Select Technology (FSPTX) at the October close.
  2. Switch from FSPTX to Fidelity Select Energy (FSENX) at the January close.
  3. Switch from FSENX to cash at the May close.
  4. Switch from cash to Fidelity Select Gold (FSAGX) at the August close.
  5. Switch from FSAGX to cash at the September close.
  6. 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 3-month Treasury bill (T-bill) yield as the return on cash and VFINX over the period December 1985 through May 2017 (about 31.5 years), we find that: Keep Reading

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