Psychological Stock Market Calendar Effects
Many trading anomalies follow time periods. That’s not completely unexpected, as many economic and business trends follow the calendar. Companies report their results quarterly. Most close their books for tax purposes at the end of the year. Retail sales follow holiday seasons, demand for commodities follows the growing season, and fuel demand varies with the weather. But some of the calendar effects make little logical sense, yet they influence trading.
The January effect
Many years, the stock market goes up in the early part of January. Why? No one is entirely sure, but the guess is that people tend to sell at the end of December for tax reasons, and then buy back those securities in January. It may also be that in the new year, everyone is flush with excitement and ready to see the market go up, so they put money to work and start buying.
If stocks go up in January, then you can get a jump on the market by buying in December, right? And that would make prices go up in December. To get a jump on the December rally, you could buy in November. And that’s exactly what people started to do, and the once-pronounced January effect is now weak to non-existent. In an efficient market, people will eventually figure out these unexplained phenomena and then trade on them until they disappear. Use these anomalies as a way to gauge psychology, not as hard and fast trading rules.
The Monday effect
The market seems to do more poorly on Monday than on the other days of the week. And no matter what the evidence shows (and the research is ambiguous and the findings vary greatly based on the time period and the markets examined), many traders believe this, so it has an effect. Why? There are two thoughts. The first is that everyone is in a bad mood on Monday because they have to go back to work after the weekend. The second is that people spend all weekend analyzing bad news from the end of the prior week, then sell as soon as they get back to the office.
The October effect
The stock market has had two grand crashes and one smaller but profound one, all in October. On October 29, 1929, a day known as Black Tuesday, the Dow Jones Industrial Average declined 12% in one day as market speculators caught up with the less rosy reality of the economy. This crash kicked off a general decline that contributed to the Great Depression of the 1930s. On October 19, 1987, known as Black Monday, the Dow Jones Industrial Average declined 23%. No one is really sure why it happened, but it did. Then, on October 13, 1989, the Dow Jones declined 7% in the last hour of trading when a leveraged buyout for United Airlines fell through.
Because of these crashes, many traders believe that bad things happen in October, and they act accordingly. Of course, bad things happen in other months. The crash in the NASDAQ market that marked the popping of the 1990s tech bubble took place in March of 2000, while the market crash of 2008 started in September when Lehman Brothers failed, but no one talks about March or September effects. The first trading day after Lehman’s failure was a Monday, however.