Post on 08-Jul-2020
PRICEPATTERNS,CHARTSANDTECHNICALANALYSIS:TEMPORALPATTERNS
AswathDamodaran
2
SeasonalandTemporalEffectsonPrices
• Empiricalstudiesindicateavarietyofseasonalandtemporalirregularitiesinstockprices.Amongthemare:– TheJanuaryEffect:Stocks,onaverage,tendtodomuchbetterinJanuarythaninanyothermonthoftheyear.
– TheWeekendEffect:Stocks,onaverage,seemtodomuchworseonMondaysthanonanyotherdayoftheweek.
– TheMid-daySwoon:Stocks,onaverage,tendtodomuchworseinthemiddleofthetradingdaythanatthebeginningandendoftheday.
• Whiletheseempiricalirregularitiesprovideforinterestingconversation,itisnotclearthatanyofthemcanbeexploitedtoearnexcessreturns.
3
A.TheJanuaryEffect
¨ StudiesonreturnsonstocksindicatethatreturnsinJanuaryarehigherthanreturnsinanyothermonthoftheyear,byawidemagnitude.
¨ Specifically,acrossallUSstocks,theaveragemonthlyreturninJanuaryhasbeen3.26%,between1926and2018,whereastheaveragemonthlyreturnforFebruary-Decemberhasbeen0.95%.
¨ Moregenerally,thereseemstobeevidence(albeitweaker)thatthestrongerthereturnsinJanuary,thebetterthereturnswillbefortheyear.
4
TheJanuaryeffectisstrongestforsmallcapstocks
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
7.00%
8.00%
January February-December
AverageMonthlyReturns:USStocksfrom1926-2018
SmallestCapDecile
Market
LargestCapDecile
5
Anditisstrongacrossinternationalmarkets
!
6
Potentialexplanations
¨ TherearethreepossibleexplanationsfortheJanuaryeffect:¤ Fundflows:Itispossiblethatinvestorswithdrawcashcollectivelyfrom
stocksinDecemberandinvestmoneybackintostocksinJanuary.¤ Windowdressingbyinstitutions:Institutionsmayselllosingstocksin
DecemberandbuythembackinJanuary.¤ Taxselling:InvestorsmaysellinDecemberfortaxreasonsandbuy
backinJanuary.¨ ThefactthattheJanuaryeffectisstrongestforsmallcap
stocksindicatesthatwhateverthereasonforithastobestrongerforsmallercompanies(whichtendalsotohavelessfollowedbyanalystsandthereforehavemoreinformationcomingfromthecompanies).
7
B.TheWeekendEffect
8
TheWeekendEffectinInternationalMarkets
9
Hasitheldup?
!
10
TheWeekendEffect:Explanations
¨ TheMondayeffectisreallyaweekendeffectsincethebulkofthenegativereturnsismanifestedintheFridayclosetoMondayopenreturns.ThereturnsfromintradayreturnsonMondayarenottheculpritsincreatingthenegativereturns.¤ Mondayeffectisworseforsmallstocksthanforlargerstocks.¤ Mondayeffectisnoworsefollowingthree-dayweekendsthantwo-day
weekends.¨ Therearesomewhohavearguedthattheweekendeffectisthe
resultofbadnewsbeingrevealedafterthecloseoftradingonFridayandduringtheweekend.
¨ Thereisevidencethattheweekendeffectgetsweakerforstockswhereshortsellingand/orputoptionsisavailable,allowingtraderstotradeaheadoftheMondayopen.
11
C.IntradayPriceeffects
¨ Asresearchersgetaccesstointradayprices,theyarefindingpatternsinstockpricesduringthecourseoftheday,withsomeclaimingtofindevidenceofamid-daymarketswoonandothersfindingevidenceofpricepatternsatthestartandendoftradingdays.
¨ Thesepatterns,eveniftheyexist,aredifficulttoexploitforstand-aloneprofitsbutmayallowinvestorstoaugmentprofitsfromothertradingstrategies.
12
TemporalEvidenceandInvesting
¨ Therearetimepatternsinstockprices:Whilemuchtimeandefforthasbeenspentchroniclingthepresenceoftemporaleffectsonstockprices,thebottomlineisthatthereislittleevidencethatinvestorshavebeenabletoexploittheseeffectstomakemoney.
¨ Butmakingmoneyonthesepatternsseemstobedifficult:Infact,attemptstoexploitthefactorsseemstoreducetheirpotency,suggestingthattemporaleffectshavelesstodowithmarketefficiencyandmoretodowithmarketmicrostructureandinformationpatterns.