Wednesday, March 01, 2017

Equity Management #4 : On Market Anomalies

Market anomalies would not normally creep into a discussion between value investors but their existence demonstrates the possibility of making profits by understanding some market patterns which has been happening on a regular basis for a while.

Even if you are a long-term investor, knowing these anomalies might assist you in deciding on a good time to buy a value stock.

a) January effect 

Stocks tend to have oversized returns in the month of January. This effect tends to work better for higher yielding stocks and worse for stocks of smaller companies.

b) Turn of the month effect

Returns tend to be oversized on the last day of the months to the third day of the following month. Explanation is that companies are eager to provide good news so it tends to happen earlier in the month.

c) The Day of the Week Effect

Mondays tend to be down days and Fridays tend to have the highest returns. Switching a sell-day from Monday to a Friday can result in substantial returns.

d) Holiday Effect

There is a belief that the trading day before the holidays tend to produce better returns but the research was based on US public holidays. I wish we that we had a similar study here.

e) Time of day effect

Markets tend to be bullish the first 45 minutes of the day and the last 15 minutes for the day.

While the effects of these anomalies are statistically significant, one doubt I have about exploiting these anomalies on a regular basis is that the profits gained would be rapidly eroded by brokerage fees.

But after filtering for stocks based on fundamentals, there is no harm choosing a buying window on the last day of the month, on any given Friday, or throughout the month of December to make your stock purchases.




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