New edition of the Almanac just published

the-uk-stock-market-almanac-2015The new edition of the Almanac, The UK Stock Market Almanac 2015, has just been released.

The 2015 edition is packed with new research. New strategies and studies appearing in the Almanac for the first time include-

  • Quarterly sector momentum strategy – a portfolio comprising the best FTSE 350 sector from the previous quarter, and re-balanced quarterly, out-performs the FTSE All Share Index by an average of 2.7 percentage points per month. A variant – buying the worst sector of the previous quarter – has performed even better.
  • Monthly sector momentum strategy – a portfolio comprising the two worst performing sectors of the previous month, and re-balanced monthly, out-performed the FTSE 350 Index by a monthly average of 1.1%.
  • Bounceback portfolio – a strategy that buys the worst performing shares in a year, and then sells them after three months into the new year; the strategy has beaten the market every year since 2003 except one year.
  • FTSE 250 quarterly reviews – what effect does joining or leaving the FTSE 250 Index have on company share prices?
  • MPC meetings – how does the monthly MPC announcement on interest rates affect share prices?
  • FOMC announcements – how do US and UK equities behave in the days around the periodic announcements of the policy statement of the Federal Open Market Committee?
  • Correlation of UK equity markets – if you want to diversify away from FTSE 100 Index, how effective will this be investing in the FTSE 250, FTSE Small Cap, FTSE Fledgling or FTSE AIM All Shares indices?
  • Daylight saving effect – what is the effect on financial markets of the switches to and from daylight saving time?
  • Sell Rosh Hashanah, Buy Yom Kippur – the US equity market tends to be weak between these two Jewish holidays, is there a similar effect in the UK market?
  • US holidays and European markets – the average daily returns for the European markets when the US market is closed is 0.32%, which is 15 times greater than the daily returns on all days.
  • Friday 13th – is Friday 13th unlucky for the stock market?
  • The Market’s Decennial Cycle – can analysis of the market’s performance in the equivalent years of decades reveal any pattern of behaviour?
  • Diversification with ETFs – ranking of the 40 ETFs with the highest trading volumes by their correlation with the FTSE 100 Index.
  • Lunar calendar and the stock market – do the phases of the moon affect the stock market?
  • The average market month – by taking the average performance of the market on each day of a month it is possible to create a chart of the average performance of the market for that month, and then to combine the 12 charts to produce a chart of the average behaviour of the market in all months.
  • The average market year – the performance and volatility of the market for an average year.
  • Women directors – what is the effect of female board members on company share prices?
  • FTSE index reviews – a brief survey of academic papers on the quarterly reviews of the FTSE equity indices.
  • Football and the stock market – what have academic papers got to say about the relationship between results on the field and subsequent football club share prices?
  • The Ramadan Effect – what effect does Ramadan have on stock markets in Muslim countries?
  • Weekly market returns and volatility – how weekly volatility has changed over the decades.

Order your copy now!


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Lunar calendar and the stock market (update)

Today will see a full moon and a total lunar eclipse (best seen from the Pacific and neighbouring regions).

A previous post looked at the relationship between the lunar calendar and the stock market. The below updates the chart that appeared in that previous post.

Lunar eclipses and the FTSE 100 Index [2014]Since the previous post there have been three total lunar eclipses:

  1. 25 May 2013 – the timing of the eclipse coincided with the high point of the year for the FTSE 100; in the four weeks following the eclipse the index fell 10%.
  2. 18 Oct 2013 – the eclipse occurred in the middle of an upswing.
  3. 14 Apr 2014 – the eclipse marked the bottom of a short down trend; the market rose 5% in the following four weeks.
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Average market behaviour in October

The following chart plots the average performance of the FTSE 100 Index during October since 1984.

Average month chart - October (2014)As can be seen, historically the market has risen the first two weeks of October, then fallen back the following week and a half, but ended strongly over the last few days.


September 2014

The following chart shows the average performance of the market in September (1984-2013) and overlays the actual performance in September 2014.

Average month chart - September overlay September 2014 (2014)As can be seen, the market in September 2014 broadly followed the general trend for all Septembers, falling consistently for the first three weeks, but then selling off more than usual in the final week in 2014.


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Strong/weak sectors in October

There have been no sectors that have consistently out-performed the market in October.

The following table lists the sectors that have been weak in October.

Sector TIDM
Automobiles & Parts
Construction & Materials
Equity Investment Instruments
Food & Drug Retailers
Health Care Equipment & Services
Household Goods
Industrial Transportation
Life Insurance
Pharmaceuticals & Biotechnology


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The Stock Market in October

We are in the market’s rock’n’roll period of the year. Stock market volatility is fairly even for the first eight months of the year. In other words, historically, from January to August the size of the daily ups and downs of the market are pretty much the same from month to month. But daily volatility starts increasing in September and peaks in October. Since 1984, average daily volatility has increased 50% in this month.

Monthly returns of FTSE All Share Index - October (1982-2013)Of course, the 1987 stock market crash greatly influences the calculation of October’s volatility and also therefore its bad reputation among investors. However, this is not strictly fair, as October is one of the stronger months of the year for the market. Since 1984 the average return for the market in October has been 0.8% (ranking it fifth of the 12 months), and over the same period the market’s return has been positive in 77% of years (second only to top month December). As can be seen in the accompanying chart, put 1987 to one side and the record looks pretty positive – the market has fallen in October in only four of the past 22 years.

But the record of October is less good outside of the UK. An academic paper of 2013 analysed 70 of the 78 operational stock markets around the world and found that October was the third weakest month of the year on average for the 70 markets. Only in Bangladesh was October found to be the strongest month.

The month is one of only two months (the other is September) that FTSE 100 stocks tend to out-perform the mid-cap FTSE 250 stocks – since 1986 the FTSE 100 Index has on average out-performed the FTSE 250 Index by 0.8 percentage points in October.

October is important as marking the end of the weak six-month period of the year (which starts with “Sell in May”). So this month investors may be looking to increase their exposure to equities anticipating the coming strong six-month period November-April; which might partly explain the last trading day of October which is the strongest last trading day of a month in the year.

In an average month for October the market tends to rise in the first two weeks, then to fall back, before a surge in prices in the last few days of the month.


Dates to watch for this month are: 3 Oct – US Nonfarm payroll report, 9 Oct – MPC interest rate announcement, 28 Oct – Two-day FOMC meeting starts.

Article first appeared in Money Observer

Further articles on October.

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First trading day of October

Tomorrow will be the first trading day (FTD) of October.

Since 1984, the FTSE 100 Index has risen on average 0.19% on the October FTD. The index has had a positive return on this day in 60% of years since 1984.

The following chart shows the returns for every October FTD since 1984.

First trading day of October (1984-2013) [2014]

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Last trading day of September

Tomorrow will be the last trading day (LTD) of September.

Since 1984 the market has on average fallen 0.07% on the LTD of September, which makes it the second weakest LTD of the year. And returns have been positive in September since 1984 in only 43% of years.

Since 2000 the average change on the September LTD has been even weaker at -0.38%, the market has only risen three times in the last 14 years on the this day, making it the weakest LTD of all.

The following chart shows the FTSE 100 Index returns for every September LTD since 1984.

Last trading day of September (1984-2013) [2014]

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Shares that like/dislike October

Shares that like October

The following table lists the four FTSE 350 shares that have the best returns in October over the last ten years. For example, Tate & Lyle has an average return of 6.1% for the month of October. Each stock has risen in October in nine of the past ten years, while Diageo is the only FTSE 350 stock to have risen in every October for the past ten years.

Company TIDM Avg(%)
Tate & Lyle 6.1
Marks & Spencer Group 5.2
Restaurant Group (The) 3.9
Diageo 3.0

Shares that dislike October

The following table lists the three FTSE 350 shares that have the worst returns in October over the last ten years. For example, William Hill has an average return of -4.4% for the month of October. All four stocks have fallen in October in at least eight of the past yen years.

Company TIDM Avg(%)
William Hill -4.4
Tullett Prebon -4.2
Centrica -1.6

An equally-weighted portfolio of the above strong October stocks would have out-performed every year an equally-weighted portfolio of the above weak October stocks by an average of 7.9 percentage points in October for the past ten years.

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US mid-term elections

Multiple ballots are held at the time of the US mid-term elections, including those at the municipal and state level, and also all the seats are up for election in the House of Representatives and a third of the seats in the Senate.

They are called “mid-term” as they take place in the middle of the four-year presidential term; in other words they take place two years after the presidential election. As such they are often regarded as a referendum on the performance of the prevailing president and his party.

In a recent article in the Financial Times, Ken Fisher described a market anomaly that he calls the 86.4 per cent miracle. According to Fisher, since 1925 returns on the S&P 500 have been positive for 67.4% of all calendar quarters, but for the 4th quarter of a mid-term election year and the two following quarters returns have been positive on average 86.4%. Fisher summarises-

midterm elections mean three straight quarters where the market rises 28 per cent more of the time than average.

What is the reason for this? According to Fisher: legislative gridlock. During electioneering campaigns politicians promise lots of radical legislation (that investors invariably dislike) to buy votes. But the reality of most mid-term elections is that the president’s party loses seats resulting in gridlock in Washington. In other words, while there is much sound and fury in the lead up to an election, it is followed by relative political calm – which investors like.

Given the high correlation of the US and UK equity markets, might this anomaly also apply to the UK?

The following chart plots the proportion of positive returns for the FTSE All Share Index for all quarters (grey bars) and those for the 4th quarter of a mid-term election (MTE) year (purple bars) and following 1st and 2nd quarters. To analyse the consistency of the anomaly over time, results are given for four different time periods.

For example, for the period 1910-2014, the FTSE All Share Index has had positive returns in 61% of all quarters, 62% of 4th quarters of a mid-term election year, 77% of the following 1st quarters, and 81% of the following 2nd quarters.

US mid-term elections and positive returns for FTAS [2014]Looking at the above chart the first observation to make is that the UK market experienced a greater proportion of positive returns in the 4th quarter of mid-term election years and the following two quarters than the average for all quarters – and this applied for all four of the different time periods tested. So this was consistent with the US results quoted by Fisher.

Regarding the period 1925-2014 (the period referred to by Ken Fisher), returns have been positive in 62.1% of all quarters (this compares a figure of 67.4% for the S&P 500 quoted by Fisher), and the average for the three (MTE) quarters has been 75.8% (compared with 86.4% for the S&P 500). So, where Fisher found that the three (MTE) quarters rose 28% more of the time than the average, in the UK the equivalent figure has been 22%.

A second observation to make is that the out-performance of the 4th and 1st (MTE) quarters over the average for all quarters has markedly increased in the most recent period from 1980. And that since 1980 the (MTE) quarter with the highest proportion of positive returns has been the 4th – in fact the UK market has risen in every 4th (MTE) quarter since 1980.

The following chart is similar to the above, except that it plots the average returns instead of the proportion of positive returns. For example, since 1910, the average return of the FTSE All Share Index for all quarters has been 1.5%, for the 4th (MTE) quarter it has been 2.4%, for the 1st (MTE) quarter 6.3%, and for the 2nd (MTE) quarter 4.2%.

US mid-term elections and average quarterly returns for FTAS [2014]Generally, the same profile of performance seen above is repeated here – all three (MTE) quarters out-perform the average. Since 1925 the average return for all quarters has been 1.7%, whereas the average return for the three MTE quarters has been 5.0%.

In 2014 the US mid-term elections will be held on 4 November, while the 4th (MTE) quarter starts 1 October. Fisher predicts “glorious gridlock” and a consequent “magical melt-up” for the market.


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What’s so special about Tuesday?

The following chart shows the average returns of the FTSE 100 Index for each day of the week since 1984. For example, since 1984 the average return of the index on Monday has been -0.01%, while for Tuesday it has been 0.06%.

Day of the week (1984-2014)But the above analysis is over a long period and the return characteristics of the five days changes somewhat over time. For example, the following chart shows the average returns of the FTSE 100 Index for each day of the week for the calendar year so far.

Day of the week (Jan-Aug 2014)This has the rather odd result that the only day with a positive return in 2014 so far has been Tuesday by a large margin – on average the the market has fallen on the four other days.

The following chart plots the cumulative returns for each of the five days of the week for the first eight months of the year.

Day of the week (Jan-Aug 2014)_cumulative

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