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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.

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Alternative U.S. Stock Market Calendar Visualizations

The Trading Calendar presents cumulative return visualizations for the S&P 500 Index across the calendar year and across each calendar month. Here are three alternative visualizations of U.S. stock market performance by calendar month: (1) percentage of positive returns; (2) ratio of average return to standard deviation of returns; and, (3) distribution of returns. Using monthly returns for the S&P 500 Index during January 1950 through April 2017 (67-68 observations per month), we find that: Keep Reading

Stock Index Changes No Longer Meaningful?

Are there opportunities to trade S&P 500 Index additions in the current market environment? In her May 2017 paper entitled “The Diminished Effect of Index Rebalances”, Konstantina Kappou examines returns for S&P 500 Index additions before and after the 2008 financial crisis. She focuses on additions because deletions generally involve confounding information such as restructuring, bankruptcy or merger. Current index management practices are to announce changes after market hours about five days in advance (announcement date – AD) and to implement changes at the specified close (event date – ED). She investigates returns during an event window from 15 trading days before AD through 252 trading days after ED. She calculates abnormal returns as differences between returns for added stocks and contemporaneous market returns. She considers 276 index additions during January 2002 through November 2013, with October 2008 separately pre-crisis from post-crisis. She excludes 48 of the additions due to lack of data or confounding information. Using daily returns for the remaining 228 S&P 500 Index additions during the specified sample period, she finds that: Keep Reading

Optimal Cycle for Monthly SMA Signals?

A reader commented and asked:

“Some have suggested that the end-of-the-month effect benefits monthly simple moving average strategies that trade on the last day of the month. Is there an optimal day of the month for long-term SMA calculation and does the end-of-the-month effect explain the optimal day?”

To investigate, we compare 21 variations of a 10-month simple moving average (SMA10) timing strategy generated by shifting the monthly return calculation cycle relative to trading days from the end of the month (EOM). Specifically, the 21 variations represent calculation cycles ranging from 10 trading days before EOM (EOM-10) to 10 trading days after EOM (EOM+10). We apply the strategy to the S&P 500 Index as a proxy for the U.S. stock market. The strategy holds the S&P 500 Index (cash) whenever the index is above (below) its SMA10 as of the most recent monthly calculation. Using daily S&P 500 Index closes and 3-month Treasury bill (T-bill) yields as the return on cash during January 1990 through mid-May 2017, we find that: Keep Reading

Combined Sell-in-May and Pre-election-year Effects

Does “sell-in-May” interact with the U.S. election cycle? In the April 2017 update of their paper entitled “Buy Equities in Winter and Sell in May in Pre-Election Years: Market Premiums and Political Uncertainty in the Presidential Cycle”, Kam Fong Chan and Terry Marsh examine interactions between seasonal (May-October versus April-November) and U.S. election cycle effects on U.S. Stock market returns. They focus on variations in the equity premium, defined as market return minus risk-free rate. Using monthly returns for U.S. equities since January 1927 and for U.S. Treasury bonds since January 1942, and contemporaneous 1-month U.S. Treasury bill yields as the risk-free rate, all through December 2015 (89 years and 22 presidential election cycles), they find that: Keep Reading

“Sell in May” Over the Long Run

Does the conventional wisdom to “Sell in May” (and “Buy in November”, hence also the term “Halloween Effect”) work over the long run, perhaps due to biological/psychological effects of seasons (Seasonal Affective Disorder)? To check, we turn to the long run dataset of Robert Shiller. This data set includes monthly levels of the S&P Composite Index, calculated as average of daily closes during the month. We split the investing year into two half-years (seasons): May through October, and November through April. Using S&P Composite Index levels, associated dividend yields and contemporaneous long-term interest rates (comparable to yields on 10-year U.S. Treasury notes) from the Shiller dataset spanning April 1871 through April 2017 (292 6-month returns), we find that: Keep Reading

Common Commodity Futures Trading Strategies

What are the most common strategies for trading commodity futures? In their brief January 2017 article entitled “Commodity Futures Trading Strategies: Trend-Following and Calendar Spreads”, Hilary Till and Joseph Eagleeye describe the two most common strategies among commodity futures traders: (1) trend-following, wherein non-discretionary traders automatically screen markets based on technical factors to detect beginnings and ends of trends across different timeframes; and, (2) calendar-spread trading, wherein traders exploit commercial/institutional supply and demand mismatches that affect price spreads between commodity futures contract delivery months. Examples of the latter are seasonal inventory build and draw cycles (as for natural gas) and precise roll cycles for expiring contracts included in commodity futures indexes. Based on the body of research and examples, they conclude that: Keep Reading

3-Cycle Prediction Engine?

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 decennial cycle at predicting the direction of the market?” To check, we forecast return for a given month by averaging: (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. Using monthly levels of the Dow Jones Industrial Average (DJIA) since October 1928, the S&P 500 Index since January 1950 and Shiller’s S&P Composite Index since January 1871, all through December 2016, we find that: Keep Reading

Mood Beta as Stock Return Predictor

Do individual stocks react differently and persistently to aggregate investor mood changes? In their December 2016 paper entitled “Mood Beta and Seasonalities in Stock Returns”, David Hirshleifer, Danling Jiang and Yuting Meng investigate whether some stocks have higher sensitivities to investor mood changes (higher mood betas) than others, thereby inducing calendar effects in the cross-section of returns. They specify mood based on three calendar-based U.S. stock market return anomalies:

  1. January (highest average excess return of all months) represents good mood, while October (lowest average excess return of all months) represents bad mood.
  2. Friday (highest average excess return of all days) represents good mood, while Monday (lowest average excess return of all days) represents bad mood.
  3. The two days before holidays (abnormally high average excess return) represent good mood, while the two days after holidays (abnormally low average excess return) represent bad mood.

They structure their investigation via a factor model of stock returns, with mood as a factor. They measure a stock’s mood beta by regressing its returns during high and low mood intervals versus contemporaneous equal-weighted market returns over a rolling historical window. Each year, they regress a stock’s monthly January and October returns versus monthly equal-weighted market returns for those months over the last 10 years. Each week, they regress a stock’s daily Friday and Monday returns versus contemporaneous equal-weighted market returns for those days over the last ten weeks. Each holiday, they regress a stocks pre-holiday and post-holiday daily returns versus versus equal-weighted market returns for those days over the last year (including the same holiday the previous year. They then use the stock’s mood betas to predict its returns during subsequent times of good and bad mood. Using daily and monthly stock returns for a broad sample of U.S. common stocks during January 1963 through December 2015, they find that: Keep Reading

Hope for Stocks Around Inauguration Days?

Do investors swing toward optimism around U.S. presidential inauguration days, focusing on future opportunities? Or, does the day remind investors of political uncertainty and conflict? To investigate, we analyze the historical returns of the Dow Jones Industrial Average (DJIA) around inauguration day. Using historical inauguration dates since 1929 (22 inaugurations) and contemporaneous daily closing levels of DJIA through January 2013, we find that: Keep Reading

VIX and VXX Behaviors Around Holidays

Does the S&P 500 implied volatility index (VIX) exhibit predictable behaviors around holidays? If so, is the predictability exploitable? To check, we look at percentage changes in VIX from three trading days before to three trading days after the following annual holidays: New Year’s Day, Super Bowl, Good Friday, Memorial Day, 4th of July, Labor Day, Thanksgiving and Christmas. To test exploitability, we employ iPath S&P 500 VIX ST Futures ETN (VXX), exchange-traded notes that hold short-term VIX futures. Using daily closes of VIX and VXX from their respective inceptions (January 1990 and February 2009) through November 2016 (214 and 62 holidays), we find that: Keep Reading

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