RIYADH, 25 October 2004 — Most investors have difficulty identifying the right investment opportunity. Many find out about the obvious ones, but unfortunately too late to benefit from them. An alternative activity to the above is for the investor to understand the trading calendar and try to profit from it.
Many investment activities that influence the market behavior take place around the same time every week, month and year. These activities also referred to as “calendar effect”, disrupt the supply and demand balance, investors’ sentiment, and accordingly move stock prices. An experienced investor can anticipate such activities and take appropriate action. A classical example of the above is the “January Effect” phenomenon, an observation that during the past seventy years small stocks in the US have far outperformed larger stocks during the month of January.
Among the most credible explanation of January Effect is that individuals often receive an influx of funds, such as bonuses and money that become available from tax-loss selling, at yearend. These individuals often wait several days to invest their cash and then buy stocks in the first week of January. This is confirmed by studies which show that around the turn of the year, there is a sharp increase in the ratio of public buy orders to public sell orders of small stocks — who own a large fraction of these stocks.
In the US there is usually an increase in trading activities and stock price volatility during a specific period of each calendar quarter. This period spans the second half of March upto around April 25, and is repeated four times per year, at the corresponding dates of each quarter. The main cause is the quarterly results which most companies start to announce two weeks after the end of each quarter.
Actual results are measured against expectations, which compounded by investor sentiment drive the stock prices in either direction. To avoid a severe punishment in the form of stock price decline, companies normally give a warning around one month before their earnings due date in case they expect to miss their forthcoming quarterly earnings. Thus the period prior to the announcement season has developed the appropriate name of, “confession season”. The above recurring activities create volatility and trading opportunities on a regular basis.
Stocks generally perform better in the first few days of the month than the middle or the end. The percentage change in the Dow Jones Industrial Average during the first half of the month is several times larger than the gain which occurs during the second half of the month. In addition, the average percentage gain of the last trading day of the month and the first six calendar days is more than the return of the entire month. The strong gains at the turn of the month are related to the inflow of funds into the equity market that result from monthly flows of income to consumers.
Stocks fare better on Fridays than on Mondays. They also do exceptionally well on any day before a big holiday, particularly Dec. 31. Daily returns between Christmas and New Year are much higher than the average daily return. Monday is by far the worst day of the week for the market, while Friday is the best day of the week.
Studies have shown that there is a sinking market feeling in the morning, pauses or declines in the afternoon then it rises strongly during the last half an hour of trading. The above performance behavior is not limited to the US stock markets, it is also shared by many markets around the world.
Investors’ sentiment influences the stock prices in a consistent manner at specific weekdays, holidays or times of a day. Based on the above information, one may identify better days and times to trade — buy or sell shares. During such preferred periods, the investor has a better chance to buy stocks at a lower price or sell them at a higher price.
Assuming all other factors are the same, the best times to buy stocks in the US are during May to October, at the end of December, on Mondays, in the morning, and during the second half of the month. And the best time to sell stocks is during early January, on Fridays, the day before a holiday, and during the first six days of the month. Although the percentage difference between the high and low is not large, however it becomes significant for frequent trades.
The above calendar related opportunities are generally true however they do not always occur, and as investors become more conscious of them, their occurrence and impact will be diluted in the future.
(Salim J. Ghalayini, [email protected], is the author of “Stocks for the Practical Investor”. He manages several investment accounts.)