FTSE 100 around FOMC announcements

The Federal Open Market Committee (FOMC) is the monetary policy-making body of the U.S. Federal Reserve System. Since 1981 the FOMC has had eight scheduled meetings per year, the timing of which is quite irregular, The schedule of meetings for a particular year is announced ahead of time [calendar here].

Starting in 1994, the FOMC began to issue a policy statement (“FOMC statement”) after the meetings that summarised the Committee’s economic outlook and the policy decision at that meeting. The FOMC statements are released around 14h15 Eastern Time.

Before 1994 monetary policy decisions were not announced; investors therefore had to guess policy actions from the size and type of open market operations in the days following each meeting. But since 1994 there has been far greater transparency over both the timing and the motivation for monetary policy actions.

This has led to a number of academic papers investigating the influence of these FOMC statements on financial markets. One such paper[1] found large average excess returns on U.S. equities in the 24-hour period immediately before the announcements (an effect the paper called the “Pre-FOMC Announcement Drift”). In other words, equities tended to be strong just before the FOMC statement. Further, these excess returns have increased over time and they account for sizable fractions of total annual realized stock returns. Quantifying this the paper says,

[since 1994] the S&P500 index has on average increased 49 basis points in the 24 hours before scheduled FOMC announcements. These returns do not revert in subsequent trading days and are orders of magnitude larger than those outside the 24-hour pre-FOMC window. As a result, about 80% of annual realized excess stock returns since 1994 are accounted for by the pre-FOMC announcement drift

A quite extraordinary finding!

And the relevance to UK equities is…?

The above quoted paper also found that such pre-FOMC excess returns occurred also in major international equity indices.

Let’s see if that is the case.

The following chart shows the average daily returns for the FTSE 100 Index for the seven days around the FOMC statements for the period 1994-2014. The seven days cover the three days leading up to the statement, the day of the statement itself A(0), and the then the three days after the statement. Given that the FOMC statement is usually released around 18h15 GMT (i.e. after the UK market has closed), A(0) can be taken as occurring in the 24 hours before the statement.

FTSE 100 around FOMC announcements

The result is quite clear, the average daily return for A(0) is 0.33%, over ten times greater than the average daily return on all other days. This does support the claim in the above referenced paper. It might also be interesting to note the weakness in equities on the day prior to the FOMC statement.

[1] David O. Lucca, Emanuel Moench, “The Pre-FOMC Announcement Drift” (2013)

Further articles on the Fed Rate and FOMC announcements.

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Do European stocks follow the US on a daily basis?

Do European stocks follow the lead of the US market from the previous day? In other words if, say, the US market is down one day are European stocks more likely to fall in their trading session the following day?

To test this the following chart plots the daily returns of the S&P 500 Index against the corresponding daily return of the EuroSTOXX 50 Index for the following day.

Europe v US stocks_EuroSTOXX 50 v S&P 500 (n-1) [2000-2016]

There is a positive correlation here, but as can be easily seen it is a very weak correlation. And this observation is supported by the very low R2 of 0.05.

So the immediate answer to the question of whether European stocks follow the US is: only very slightly.

However, the following chart is interesting. This next chart plots the daily returns for the two indices as above, but this time it is the daily returns for the same day. In other words, this time the US market movements come after those in Europe.

Europe v US stocks_EuroSTOXX 50 v S&P 500 [2000-2016]

As can be seen, here the correlation is higher than in the above first case. The R2 = 0.3; which while not statistically very significant is quite a bit higher than in the first case.

So, this might suggest that it is the US market that follows Europe.

Is this the case?

Probably not. Rather it is likely to be a feature of the trading hours of the respective markets. The illustration below shows the trading hours for five exchanges.

NB. Strictly, UK and Swiss stocks are not in the EuroSTOXX 50 Index but the exchanges are included here for reference.

Europe v US stocks_exchange hours

The times referenced here are UTC – which are accurate at the time of writing (in May), but will be shifted one hour when countries switch to Daylight Savings Time. However, for the purposes of the discussion here the times are fine, because what we are interested in is the overlap of trading hours at the end of trading in Europe and the beginning of trading in New York each day.

As can be seen, each day there is an overlap of a couple of hours between the Paris and New York exchanges, and longer for Frankfurt and New York. Each day European markets can be active at their open in the morning (reacting to overnight developments – including US stock movements), then often these markets can tread water for a while waiting for the US market to open in the afternoon. The European markets can then take their lead from the US for the rest of their trading day.

The higher correlation seen in the second chart above is therefore probably reflecting this overlap period when European stocks are influenced by what is happening in the US that same day.

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FTSE 100 and FTSE 250 Quarterly Review – June 2016

After market close on 1 June 2016 FTSE Russell confirmed the following changes to the FTSE 100 and FTSE 250 indices. The changes will be implemented at the close Friday, 17 June 2016 and take effect from the start of trading on Monday, 20 June 2016.

FTSE 100

Joining: Hikma Pharmaceuticals [HIK]

Leaving: Inmarsat [ISAT]

FTSE 250

Joining: Ascential [ASCL], CMC Markets [CMCX], Countryside Properties [CSP], CYBG [CYBG], Hill & Smith Hldgs [HILS], Metro Bank [MTRO], Smurfit Kappa Group [SKG]

Leaving: Highbridge Multi-Strategy Fund [HMSF], Interserve [IRV], Jimmy Choo [CHOO], Lookers [LOOK], Melrose Industries [MRO], Northgate [NTG], Ophir Energy [OPHR]

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The Stock Market in June

A quick glance at the accompanying chart (showing the monthly returns of the FTSE All-Share Index in June since 1984) shows that this is not a good month for shares. Historically, the May-June period has been the weakest two-month period in the year for the equity market.

Monthly returns of FTSE All Share Index - June (1984-2015)

In the nine years since 2007 the market has only risen in June in one year ­ the average June return over those nine years is -2.8%. And in June last year the index fell 6.%! This dismal record makes June the stand-out worst month for shares in recent years.

Over the longer term the record is a little better, since 1970 the average return in June has been -1.1%, but also over this period it is the only month in the year with more negative returns seen in the month than positive returns.

So, not much cheer to be expected for shares this month.

In an average June the market starts strong, hitting its month high on the second or third trading day, but prices then drift down steadily for the rest of the month, although the market ends the month on a positive note – the last trading day is the second strongest in the year.

Regarding sectors, despite the overall market weakness in June, three sectors have gone against the trend and seen consistent strength in the month: Beverages, Oil & Gas Producers and Pharmaceuticals & Biotechnology. But while many sectors not surprisingly experience weakness in June, none are consistently weak over many years.

Not much action on the results front this month, June is the quietest month for results from FTSE 100 companies – just two companies making announcements this month.

This is quite a busy month on the economics front: there is the ECB Governing Council Meeting on the 2nd, US Nonfarm payroll report on the 3rd, FOMC interest rate announcement on the 15th, followed the next day by the MPC interest rate announcement on the 16th. And not to forget Triple Witching on the 17th.

Article first appeared in Money Observer

Further articles on the market in June.

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The UK Almanac Calendar

The UK Almanac maintains a calendar of important market dates. The calendar can be viewed on the UK Almanac web site here, or synced with your own online calendar (see below).

Add the above calendar to your own Android, iPhone or online calendar:

html button

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UK EEC membership referendum in 1975

The UK joined the European Economic Community (EEC) in 1973. A couple of years later they thought, “errr”, and held a referendum on 5 June 1975 to decide whether to stay in. The electorate voted Yes by 67% to 33% to stay in the EEC. [Further information about the 1975 referendum can be found at Wikipedia.]

What impact did this referendum in 1975 have on shares?

Let’s see.

The following chart shows the FTSE All-Share Index for the year 1975.  The referendum was in June and is marked on the chart.

EC ref_FTSE All-Share Index 1975

Quite clearly, the market was strong in the lead up to the referendum; part of this strength was as a result of the market bouncing off the multi-year low set in January 1975. The market peaked the day after the referendum, and then fell away afterwards.

This pattern of behaviour is similar to that seen for General Elections – equities are often strong in the months leading up to an election and then weak immediately afterwards. [More info on the stock market around UK General Elections.]

Let’s now zoom in and see what happened in the days around the vote.

The following chart shows the daily returns of the FTSE All-Share Index in the five days before and five days following the referendum.

EC ref_FTSE All-Share Index day returns around the EC referendum, 1975

So, some strength before, and then falling away quickly afterwards.

This pattern of behaviour is not what one might expect. Generally investors dislike uncertainty and so one might have expected to see weakness before the referendum and then a relief rally afterwards as the uncertainty is removed (regardless of the result). But that’s not what happened.

To get some idea of the state of the market and economy prevailing at the time of the referendum in 1975 the following extract  comes from George G. Blakey’s superb A History of the London Stock Market 1945-2009.

Companies were not slow to take advantage of this new-found enthusiasm for equities to try to rebuild their balance sheets and in the three weeks to mid-March there were calls for £180 million in rights issues. They were relatively easily absorbed but kept the index below 300 until the budget in mid-April when expectations of action by the Chancellor on wages and public expenditure prompted a renewed advance. In the event a £1.25 billion increase in taxes through 2p on the standard rate and surcharges on drink and tobacco with VAT up from 8% to 25% on luxury items, was taken as evidence that Mr Healey meant what he had said about raising taxes unless the social contract was more strictly observed There was also a promise of a £1 billion reduction in public expenditure — but given that the PSBR for 1975 had more than tripled to £9 billion since he had become Chancellor, and looked like heading for £12 billion in the current year, this carried little weight. Equities received a further boost in early June from the Referendum resulting in a 2-to-1 vote in favour of the UK staying in the EEC and from further gains in the US taking the the Dow well above 800, but after peaking at 365.3, the index began to slip as investors turned their attention to what sterling was saying about the economic situation.

The momentum of the recovery in equities and gilts to a large extent had masked the deterioration in sterling, where the weighted depreciation had increased from 21.7% in early January to 28.9% by the end of June. But if the domestic market had been impressed for a time by Chancellor Healey’s “tough” budget, clearly the international community had not. Thanks to the plight of sterling, the message had got through at last to the domestic market, Mr Healey and the TUC included. To cure inflation by demand reduction alone would cause such severe unemployment that there was seen to be no alternative but to introduce a workable incomes policy combined with a reduction in public expenditure to put government financing back on a sound footing and to leave room for resources to be diverted for the improvement of the trade balance and for productive investment. The demotion of Mr Benn from his post as Minister for Industry to the Department of Energy was another step designed to rebuild business confidence.

It is interesting to note that the estimable George Blakey devotes just half a sentence to the 1975 referendum.

And a few other things that happened in 1975 (again the source is  A History of the London Stock Market 1945-2009)-

  • In January the FT30 was yielding 13.4% and selling on a PE of 3.8 (And, yes, this was the bottom of the market.)
  • Burmah Oil called for government assistance to help service its huge US loans.
  • Maurice and Charles Saatchi entered the public arena with a reverse takeover of quoted advertising agency, Compton Partners, with the new holding company called Saatchi & Saatchi Compton.
  • In October Jim Slater announced his retirement from Slater Walker and City life. While this signalled the end of an era, on the other side of the pond 1975 saw Hanson make its major move into the US.
  • Chancellor Healey introduced a 10% pay increase limit in an attempt to reduce inflation from 24% to 10%.
  • In early November, Chancellor Healey made formal application to the IMF for a $2 billion loan; an IMF team later flew into London to “look at the books”.
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World’s Simplest Trading System

Here’s the system:

At the end of every month,

  • if the index is above its 10-month simple moving average: the portfolio is 100% in the market
  • if the index is below its 10-month simple moving average: the portfolio is 100% in cash

 And that’s it.

So, if we take the FTSE 100 Index as an example, if at the end of a month the FTSE 100 is above its 10-month simple moving average then either,

  • the portfolio moves into the market by buying, say FTSE 100 ETFs, (these will be the easiest instrument for most investors, but equally futures, CFDs or spread bets could be used), or
  • nothing needs to be done if the portfolio is ready in the market.

Conversely, if at the end of a month the FTSE 100 is below its 10-month simple moving average then the portfolio sells the ETFs and moves 100% to cash; if it is already in cash then nothing is done.

[NB. OK, it's possible that this isn't absolutely the simplest trading system imaginable, but apart from buy and hold it is unlikely there are many systems much simpler than this one!]

The following chart illustrates such a portfolio for the FTSE 100 Index since 1995. The diamond markers indicate the decisions made at the end of each month whether to be in the market (green diamond) or in cash (red diamond).

SMA (10M) Trading System

Roughly, one can see that the system kept the portfolio in the market in uptrends and out of the market (in cash) when the market fell.

This trading system is well-known in the US, what we will look at here is:

  1. If the trading system can be profitably applied to the FTSE 100 Index.
  2. Whether 10 months is the optimum parameter for the moving average (or would a 5-month, or 15-month, moving average produce superior results)?

Terminology: we will use SMATS(10) to refer to the 10-month simple moving average trading system. And SMATS(5) for the trading system using the 5-month simple moving average etc. Below we will analyse the trading system for 14 different parameters of the simple moving average, i.e. from SMATS(4) to SMATS(16).

Performance analysis

First, let’s look at the overall profitability of SMATS.


The following chart plots the values of the SMATS portfolios for the 14 different simple moving averages (i.e. 4-month to 16-month). As a benchmark the FTSE 100 is added (i.e. this is the value of a buy and hold FTSE 100 portfolio). All values were re-based to start at 100.

SMA Trading Systems (4M-16M) [1995-2016]

Some observations:

  1. By the end of the 20-year period all the SMATS portfolios had out-performed the FTSE 100 – except SMATS(5).
  2. By the end of the period, SMATS(10) had the highest value; although it can be seen that it wasn’t consistently the most profitable throughout the whole period.
  3. For the first six years (up to August 2001) all SMATS under-performed the FTSE 100. This was caused by the market volatility in 1998 and 2001, which caused the portfolios to be whipsawed in and out of the market.

The following chart summarises the final portfolio values in 2016 after running the trading system from 1995.

SMA trading system values [2016]

By 2016 the STATS(10) portfolio had the highest value of all portfolios at 269; the FTSE 100 buy and hold portfolio a value of 1999.


We’ve looked at profitability, let’s now consider the risk incurred by each portfolio. We’ll use volatility as a (fairly standard) proxy for risk.

The following chart shows the volatility of the portfolios over the 20-year period.

SMA trading system volatility [1995-2016]

Not surprisingly the FTSE 100 had the highest volatility. The volatility of the SMATS portfolios was less due to the fact they were in cash for part of the time; broadly their volatility increased as the moving average month parameter increased.

The Sharpe Ratio combines returns with volatility to provide a comparative measure of profitability per unit of risk incurred. The ratio’s purpose is to answer questions of the form: is the profitability of a strategy justified by the risk incurred, compared to another strategy?

The following chart plots the Sharpe Ratio for the 14 portfolios. (The benchmark for the Sharpe Ratio calculation was the FTSE 100 Index.)

SMA trading system Sharpe Ratio

SMATS(10) had the highest (i.e. the best) Sharpe Ratio, although close behind were SMATS(14) and SMATS(15).

Max Drawdown

Maximum Drawdown decribes the maximum loss a portfolio suffered from a previous high value. For example, in this test SMATS(10) had a max drawdown value of 22.8%. This means that over the 20-year test period the portfolio was at most 22.8% under water (from a previous high).

Frankly, max drawdown has more significance for strategies that employ leveraged products (e.g. futures), as drawdowns incur realised losses as margins have to be paid. By contrast in the case of unleveraged equities or ETFs, drawdowns incur unrealised losses. Having said that, unrealised losses can still be uncomfortable and can have a major adverse psychological impact on the investor or trader.

The following chart shows the max drawdown values for the 14 SMATS portfolios and the FTSE 100 Index.

SMA trading system Max Drawdown

Here the SMATS(10) portfolio only had a middling relative score. The best portfolios (i.e. those with the lowest max drawdowns) were: SMATS(7), SMATS(14), SMATS(15), and SMATS(16).

Trade frequency

The following chart shows the average number of trades for the year for each portfolio. For example, over the 20-year test period SMATS(10) portfolio traded 36 times, which is an average of 1.7 times a year.

SMA trading system Average Trades-yr

As would be expected the number of trades decreases as the length of the moving average month parameter increases. In other words, systems get whipsawed less with longer moving averages.

The profitability figures above did not include transaction costs, but with the systems averaging under 2 trades per year the transaction costs would not be significant.

Summary of analysis

The following table summarises the above analysis. The values are colour-coded with green being the best value through to red being the worst for each respective analysis.

SMA trading system analysis (FTSE 100, 1995-2016)


  1. This simple moving average trading system did work for the FTSE 100 (i.e. it out-performed the FTSE 100 Index) over the 20-year period.
  2. The best performing portfolio was indeed SMATS(10), i.e. the trading using the 10-month simple moving average. It had the highest absolute profitability and also the highest Sharpe Ratio. After SMATS(10), the best portfolio was the SMATS(14), followed by SMATS(15).
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Days of the week

We last looked at the performance of the FTSE 100 Index on the days of the week in September 2014. Time to see if anything has changed.

Longer-term analysis

First, to review how the Index has performed on the different days of the week over a range of periods.

The following chart shows the average returns of the FTSE 100 Index for the five days of the week over the periods 1984-2016, 2000-2016 and 2012-2016. For example, since 1984 the Index has fallen by an average 0.025% on Mondays.

Day of the week performance of FTSE 100 - average return

Broadly, a similar profile of behaviour can be seen over the three periods. Namely, the Index is weak on Mondays and Wednesdays and relatively strong on Tuesdays, Thursdays and Fridays. The weakest day is obviously Monday, while the strongest day is Tuesday (this profile has been particularly strong in the last four years).

It can be observed that the strength of the market on Fridays has been steadily declining in the three periods shown here.

The following chart is similar to the above except instead of average returns it show the proportion of days seeing positive returns. For example, since 1984 the Index has risen on 49.7% of Mondays.

Day of the week performance of FTSE 100 - positive

The profile seen here is similar to that seen in the first chart. The weak day again is Monday, although here Thursday is relatively stronger.

So, that’s the longer term, let’s look now at the behaviour so far in 2016.


The following chart shows the average returns of the FTSE 100 Index for the five days of the week over the period Jan-May 2016.

Day of the week performance of FTSE 100 [2016] - average return

As for the longer term, Mondays are still weak. However, previously strong Thursday is now the weakest day of the week. So far this year it is Friday that has seen the highest average day returns.

The following chart shows the proportion of positive return days for each day of the week.

Day of the week performance of FTSE 100 [2016] - positive

This chart reinforces the observation that Mondays and Thursdays have been weak so far in 2016. But the day with the most positive day returns has been Wednesday - which arguably can allow it to claim the strongest day of the week crown so far in 2016.

The following chart shows the cumulative performance of the Index for each respective day of the week. For example, the FTSE 100 Index has a cumulative return of 6.6% for all Fridays so far in 2016.

Cumulative performance of FTSE 100 by day of the week [Jan-May 2016]

Further articles on the Day of the Week Effect.

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Sell in May Sector Strategy (SIMSS)

The Sell in May Effect describes the tendency of the market over the six-month period Nov-Apr to outperform the market in the other six-month period (i.e. May-Oct).

The effect can be seen in the following chart, which plots the cumulative average daily returns of the market (i.e. it gives a representation of the market moves in an average year). More information on this chart can be found here.

Santa Rally [2015] 04

As can be seen the market tends to be strong from November to April, and then flat for the six-month period May to October.

An update tracking the accuracy of this effect can be found here, and further articles here.

The problems of exploiting the Sell in May Effect

Although the effect is statistically significant, it is not an easy anomaly to exploit economically. In theory an investor might be long stocks Nov-Apr and then move to cash for May-Oct. But as can be seen in the above chart, the market doesn’t necessarily fall in the summer period (except possibly the short May-Jun period), rather it is flat. And by moving to cash the investor would forego dividends paid in the May-Oct period.

It may make sense moving to cash if interest rates were high (i.e. to benefit from high returns on cash for the summer period) – but that is not the case currently. And in any case that has to be balanced with the fact that when interest rates are high expected growth rates in equities tend to be high as well (i.e. not a time to be out of the market).

One significant reason why it may make sense to be out of the market over the summer period is that volatility is much higher then than in the Winter period (as shown here). For example, eight of the ten largest one day falls in the FTSE 100 Index happened in the Summer period. Hence, not only are returns lower in the Summer, but also risk-adjusted returns are significantly lower.

But generally, this is a little frustrating: the Sell in May Effect is a significant market anomaly, but tricky to exploit.

So, what to do?

Exploit the sector rotation

One idea is to stay in the market throughout the year but to re-balance a stock portfolio according to which sectors perform the best in the two six-month periods as defined by the Sell in May Effect.

The following two tables show the performance of the FTSE 350 sectors in the respective summer and winter periods since 1999. The tables have been ranked by average returns of the respective sectors over the 17-year period.

Sector performance in the summer period since 1999

SIM sector summer performance

 Sector performance in the winter period since 1999

SIM sector winter performance

From these tables two portfolios of sectors can be constructed that have historically performed strongly in the respective summer and winter periods.

A few filters were applied:

  1. Sectors with less than 4 component stocks were not considered
  2. Sectors must have a minimum 13-year track record
  3. Standard deviation (i.e. volatility) of a sector’s returns must be below the average standard deviation
  4. Positive returns must be over 50%

The portfolios selected were-

Summer Portfolio Winter Portfolio
Gas, Water & Multiutilities Construction & Materials
Beverages Industrial Engineering
Health Care Equipment & Services Chemicals

So, the Sell in May Sector Strategy (SIMSS) is

  • in the summer period: long sectors Gas, Water & Multiutilities, Beverages, and Health Care Equipment & Services
  • in the winter period: long sectors Construction & Materials, Industrial Engineering, and Chemicals

Performance of SIMSS

The following chart shows the simulated performance of the Sell in May Sector Strategy backdated to 1999 compared to the FTSE 100 Index.

SIMSS v FTSE 350 [1998-2016]

After 17 years the SIMSS portfolio would have grown in value to 1021 (from a starting value of 100). While the FTSE 100 (buy and hold) portfolio would have grown to 111.

This simulation does not include transaction costs, but as the strategy only trades twice a year these would not significantly change the above results.

More articles about the Sell in May Effect.

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Sell in May and come back…when?

The old saying goes “sell in May”.

But if you sell in May when should you come back into the market?

Well, in its original form the adage was, “sell in May and go away, don’t come back till St Leger Day”. And St Leger is the last big event of the UK horse-racing calendar, and usually takes place in mid-September.

A complementary anomaly (most likely originating in the US) is the Halloween Effect, which holds that stocks see the bulk of their gains in the six-month period 31 October to 1 May.

At some point it seems the sell in May saying and the Halloween Effect merged to become one. Such that today the sell in May adage is usually taken to mean that the summer period of (relatively) poor returns ends 31 October.

So, so far we have possible entries back into the market of mid-September or end October.

What does the recent data say?

The following chart shows the annual trend of the FTSE 100 Index calculated on data from 1984. (More information on this chart can be found here.)

Santa Rally [2015] 04

The chart illustrates fairly clearly the different nature of the two six-month periods:

  • 1 May – 31 October (Summer period): when the six-month return tends to be flat, and
  • 1 November – 30 April (Winter period): when the market tends to rise.

The data does support the claim that the greater part the market’s gains come in the Winter period.

Over the whole six-month Summer period the market doesn’t necessarily fall, but it does tend to be flat, and certainly the returns are less than in the Winter period.

However, it can be seen in the chart that the market is absolutely weak for the two-month period May to June.

So, according to the data since 1984, if you do sell in May, one time for coming back into the market would be the end of June.

More articles on the Sell in May Effect.

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