The Stock Market in December

From the end of October shares tend to be strong through to the end of the year. This is partly a result of the Sell in May effect (aka Halloween effect), where equities are relatively strong over the six-month period November – April. So, the market does have a fair following wind at this time of the year, and then in December shares often become super-charged.

Since 1970 December and April have been the best two months of the year for shares. Since then the FTSE All-Share Index has risen in December in 74% of all years and the average month return has been 2.1%.

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

As can be seen in the above chart the market has only fallen in six years since 1984. However, two of those negative December returns occurred in the last two years, 2014 and 2015. Which does raise the interesting prospect that December’s long-established pattern of strength in December may be changing.

An average December

In an average December, shares have in fact tended to be weak in the first couple of weeks, but then around the tenth trading day shares charge upwards. The last two weeks of December is the strongest two-week period of the whole year (and is often referred to as the Santa Rally).

Internationally, one could mention that December is one of the few months of the that the FTSE 100 Index has on average out-performed the S&P 500.

While December has been a good month for capital gains, it’s the worst month for income investors with only five FTSE 100 companies paying interim or final dividend payments in the month.

Shares

FTSE 350 shares that have tended to be strong in December are: Ashtead Group [AHT], Balfour Beatty [BBY], and William Hill [WMH] ­ these three shares have risen every December for the past ten years. While the shares that have historically been weak this month have been: Debenhams [DEB], Marks & Spencer Group [MKS], and Rank Group [RNK]

Diary

Dates to watch this month are: 1 Dec – US Nonfarm payroll report, 13 Dec – FOMC announcement on interest rates, 14 Dec – MPC interest rate announcement at 12 noon, 15 Dec – Triple Witching. And note that the London Stock Exchange will close early at 12h30 on the 23rd and will be closed all day on the 26th and 27th.


Article first appeared in Money Observer

Further articles on the market in December.

 

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FTSE 100 and FTSE 250 Quarterly Review – December 2016

After market close on 30 November 2016 FTSE Russell confirmed the following changes to the FTSE 100 and FTSE 250 indices. The changes will be implemented at the close Friday, 16 December 2016 and take effect from the start of trading on Monday, 19 December 2016.

FTSE 100

Joining: ConvaTec Group [CTEC],  Smurfit Kappa [SKG]

Leaving: Polymetal International [POLY], Travis Perkins [TPK]

FTSE 250

Joining: Ferrexpo [FXPO], NewRiver REIT [NRR], Nostrum Oil & Gas [NOG], Polymetal International [POLY], Travis Perkins [TPK]

Leaving: Countrywide [CWD], DFS Furniture [DFS], Laird [LRD], NCC Group [NCC], Smurfit Kappa [SKG]

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Flotations

The table below shows the monthly frequency of company flotations (IPOs) and listing on the London Stock Exchange. The dark bars show the month frequency for all flotations of companies currently listed on the LSE, and the lighter bars are limited to just the 162 companies floated from the beginning of 2010 to 2015.

Month of flotation dates for LSE listed companies As can be seen, the most popular month for flotations has been January, 14% of all flotation took place in this month. The second most popular month has been July (11%). By contrast the least popular month is August, followed by February and September.

This profile has changed somewhat in recent years. Since 2010, the two busiest months for flotations have been June and July (13%), followed by March. And, oddly, January is now the least popular month for flotations (3%).

Flotation performance

The following chart plots the performance of an equally-weighted portfolio comprising the 162 companies that floated 2014-2015. For reference, the FTSE 100 Index is also shown.

Flotation portfolio [2015]It is not a pretty sight. Since the start of 2014, the FTE 100 Index has fallen 8%, but the Flotation Portfolio has declined 31% in value.


Extract taken from The UK Stock Market Almanac 2016.

Order the newly published 2017 edition of the Almanac.

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Reminder – the new Almanac for 2017 has just been released!

Almanac-2017-Cover

The new edition of the Almanac,The UK Stock Market Almanac 2017, has just been published.

A previous blog post detailed all the new studies and strategies in the 2017 edition. The 2017 Almanac also updates some of the studies of seasonality trends and anomalies that have featured in previous editions. Including-

Seasonality and anomaly updates in the new edition

  • 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 had its best year ever last year.
  • Strong/weak shares by month – analysis of FTSE 350 shares reveals those that have performed consistently strongly or weakly for each month for the past ten years. Some shares have risen (or fallen) in a specific month for every year since 2007.
  • FTSE 100/S&P 500 Switching Strategy – the strong/weak months for the FTSE 100 Index relative to the S&P 500 Index are identified; and a strategy of switching between the two markets is found that produces twice the returns than either market individually.
  • Low/high Share Price Strategy – a portfolio of the 20 lowest priced shares in the market has out-performed a portfolio of the 20 highest priced shares by an average 38.7 percentage points each year since 2002.
  • Quarterly Sector Strategy – The strongest/weakest sectors for each quarter are identified; and the Quarterly Sector Strategy continues to beat the market.
  • 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 2.0 percentage points per month. A variant – buying the worst sector of the previous quarter – has performed even better.
  • FTSE 100/250 Monthly Switching Strategy – on the back of research into the comparative monthly performance of the two indices, a strategy of switching between the two markets is found that greatly out-performs either index individually.
  • Day of the Week Strategy – a strategy exploiting the day of the week anomaly that out-performs the FTSE 100 Index. [wk.??, with day of the week analysis also on p?? in stats section]
  • Monthly Share Momentum Strategy – a monthly re-balanced momentum portfolio of FTSE 100 stocks beats the market.
  • Sell in May – this extraordinary effect remains as strong as ever: since 1982 the market in the winter months has out-performed the market in the summer months by an average 8.8 percentage points annually; in the year since the last edition of the Almanac the out-performance was 4.2 percentage points.
  • 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?
  • Market seasonality (day/week/month) – December is still the strongest month in the year for the stock market, while September is the weakest. Analysis is also updated for weekly and daily performance of the market (Sinclair Numbers) [p??]
  • Day of the week performance – Thursday is the new weakest day of the week (Monday used to be), and the strongest day is now Friday. [p?? (in stats section)]
  • Turn of the month – The market tends to be weak a few days either side of the turn of the month, but abnormally strong on the first trading of the new month (except December). [p?? (in stats section)]
  • FTSE 100 Index quarterly reviews – as before, it is found that share prices tend to rise immediately before a company joins the FTSE 100 index and are then flat or fall back. Before a company leaves the index share prices tend to fall and then rise after the exit. [wks 10, ??]
  • FTSE 100 and FTSE 250 indices – the trend continues for the FTSE 100 Index to greatly under-perform the mid-cap index in January and February and out-perform it in September and October. [p?? – (in stats section)]
  • FOMC announcements ­ how do US and UK equities react in the days around the periodic announcements of the policy statement of the Federal Open Market Committee.
  • Gold ­ does the price of gold exhibit a monthly seasonality?
  • Holidays and the market – in recent years the market has been significantly strong on the days immediately before and after holidays and weak fours days before and three days after holidays.
  • Trading around Christmas – how do share prices behave in the days around Christmas?
  • The January Effect – analysis suggests that performance in January is inversely proportional to company size (i.e. small companies like January!)
  • Very large one-day market falls ­ analysis of the behaviour of the FTSE 100 Index for very large one-day falls.
  • Lunar calendar and the stock market – do the phases of the moon affect the stock market?
  • Super Bowl  – ­does the Super Bowl Indicator really accurately predict the market for the year?
  • Market momentum grid – a reference grid is presented giving the historic tendency of the market to rise (fall) following a series of consecutive daily/weekly/monthly/yearly rises (falls). As before, it is found that trends become more established the longer they last, and the market displays greater momentum for longer frequencies. [p?? (in stats section)]
  • UK and US markets – the correlation between the UK and US markets has been increasing since the 1950s, and in the years since 2010 has been stronger than ever. [p?? (in stats section)]
  • Correlation of UK equity markets – if you want to diversify away from FTSE 100 Index, how effective will it be investing in the FTSE 250, FTSE Small Cap, FTSE Fledgling or FTSE AIM All Shares indices? [p?? (in stats section)]
  • Seasonality of GBPUSD ­  – what are the strong/weak months for GB sterling against the US dollar?
  • 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.
  • The market’s decennial cycle – can analysis of the market’s performance in the equivalent years of decades reveal any pattern of behaviour?
  • Ultimate Death Cross  – ­ has the 50-month moving average crossed down through the 200-month moving average?
  • The Long-Term Formula – the formula that describes the long-term trend of the stock market and gives a forecast for the FTSE 100 in December 2040.

In addition to the above, analysis is also updated for the standard Almanac features such as: comparative performance of UK equity indices, company ranking by financial and price behaviour criteria, price history profile of the FTSE All Share Index, sector profiles of the FTSE 100 and 250 indices, annual performance of sectors etc.

Order your copy of 2017 Almanac now!

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Best books for investors

A couple of years ago the great investment writer, Jason Zweig, wrote an article listing his best books for investors. Zweig recommended 15 books (which can be seen in the original article). The 15 books are listed in the following table (ordered by the year of first publication).

Author Title Year
Bertrand Russell Sceptical Essays or The Scientific Outlook 1928
Fred Schwed Where Are the Customers’ Yachts? 1940
Benjamin Graham The Intelligent Investor 1949
Darrell Huff How to Lie with Statistics 1954
Adam Smith The Money Game 1968
Burton G. Malkiel A Random Walk Down Wall Street 1973
Charles P. Kindleberger Manias, Panics, and Crashes 1978
Roger Lowenstein Buffett: The Making of an American Capitalist 1995
Richard Feynman Surely You’re Joking, Mr. Feynman! 1997
Peter L. Bernstein Against the Gods: The Remarkable Story of Risk 1998
John C. Bogle Common Sense on Mutual Funds 1999
Gary Belsky and Thomas Gilovich Why Smart People Make Big Money Mistakes and How to Correct Them 1999
E. Dimson, P. Marsh, M. Staunton Triumph of the Optimists 2002
Alice Schroeder The Snowball: Warren Buffett and the Business of Life 2009
Daniel Kahneman Thinking, Fast and Slow 2013

One might quibble over the inclusion of one or two books here (that is the joy, and purpose, of lists), and it is important to remember that this is a list for investors (a list for traders would inevitably look rather different), but overall most would probably agree that this is a fine list.

It is interesting to see the distribution of publication dates of the recommended books.  Only three were first published in this century. And, of those, the most recently published book is not focused on investing, while the one before that is about a chap who started investing in the 1940s.

The median year for the 15 books is 1995, but the mean year of publication (OK, a rather silly calculation in this context but why not?) is 1980.

The following chart shows the year of first publication of the 15 books mapped onto the Dow Jones Industrial Average (log scale).

Recommended books for investors

On this chart it can be seen that the publication dates of six of the books are clustered around the end of the twenty-year bull market that started in 1980. Perhaps bull markets give authors the confidence to write books, or investors the appetite to read them. Certainly few classic books would appear to have been written in recent years.

But also, as it is often said, the essential lessons of investing change little over time.

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Monthly seasonality of FTSE 100 Index

Does the FTSE 100 Index display a monthly seasonality?

[We last looked at this in 2014, so time to see if anything has changed.]

Positive returns

The following chart shows the proportion of months that have seen positive returns for the FTSE 100 Index since 1980. For example, the index rose in April in 28 years since since 1980 (76%).

FTSE 100 Index positive returns by month [1980-2016]

Broadly, the pattern of behaviour has not changed greatly in the last two and a half years. The months which have seen the highest number of positive returns are still April, October and December.

But in recent years, since 2000, February has been getting relatively stronger, while January and March relatively weaker. Since 1980, the proportion of positive return months for January is 59%. but measured from 2000 the figure falls to 35%.

Average returns

The following chart plots the average month returns for the FTSE 100 Index for the period 1980-2016. For example, since 1980 average return in January of the index has been 0.9%

FTSE 100 Index average returns by month [1980-2016]

Similar to the previous study, the standout two strong months of the year since 1980 have been April and December. Although since 2000 the performance of December has been dropping off and has been over-taken by October as the second best performing month in recent years.

The months with the lowest (in fact, negative) returns are still May, June and September. Again, things have changed slightly in recent years, with January equal with September as having the worst average returns since 2000.

The following chart is similar to the above (in that it plots the index average returns by month, the short brown horizontal bars), but it adds a measure of the extent of variation away from the average for each month (the measure is 1 standard deviation).

FTSE 100 Index average returns by month (1SD) [1997]

An obvious observation to make is that the variability of returns around the average are very large for all months. The months that have seen the greatest variability (i.e. volatility) have been September and October, and to a slightly lesser extent January. The months with the lowest variabilility have been April and December.

Cumulative returns

The following chart shows the cumulative returns indexed to 100 for each month. For example, £100 invested in the FTSE 100 only in the month of April from 1980 would have grow to £217 by 2016.

This is not meant to represent real-life investable portfolios (e.g. transaction costs are not included), but to illustrate the large effect the returns differences can have on cumulative performance over a long term,

FTSE 100 Index cumulative returns by month [1980-2016]

Notes

  1. The superior returns for April and December can be clearly seen on this chart. Indeed, the close correlation of returns for the two months is remarkable, and rather odd. However, as can be seen, due to the recent couple of weak years for December, performance has been diverging between the the two months.
  2. The most striking change in behaviour is undoubtedly that for January. This was the strongest month for the FTSE 100 Index until the beginning of the millennium, since when its performance has fallen off quite dramatically.
  3. In a less dramatic fashion (than January) the returns for November have decreased strongly since 2005.
  4. The months represented by dashed lines are the six months May to October. These lines can be seen to largely occupy the lower part of chart – which supports the Sell in May effect.
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Monthly seasonality of oil

Does the price of oil display a seasonality pattern?

[We last looked at this in 2014 in this article; time to update the figures.]

To briefly recap, the original study found that since 1986 the price of oil displayed a seasonality for two parts of the year-

  • March-September when WTI is strong, and
  • October- February when the WTI price has been relatively weak

Let’s see if this is still the case.

Mean returns

The following chart plots the average month returns of the price of WTI (West Texas Intermediate) for the period 2000-2016.

Crude Oil (WTI) [2000-2014] Monthly return average

A two-part pattern for the year is still observable, but the periods have shifted slightly.

As can be seen, since 2000, WTI month returns have tended to be high in the period February to June. The strongest month of the year in this period has been February with an average return in the month of 4.8%.

The weak part of the year has also shifted: to September to January. The weakest month has been November, with an average price return of 3.2%.

Positive returns

The following chart plots the  proportion of monthly returns that were positive over the same period.

Crude Oil (WTI) [2000-2014] Monthly return positive

This pattern of positive returns largely supports the preceding analysis.

Since 2002 WTI has seen negative returns in February in only 3 years.

By contrast, September has seen positive returns in only 6 years since 2000.

The new seasonality pattern can thus be summarised as-

  1. February-June when WTI is strong, and
  2. September-January when the WTI price has been relatively weak

Cumulative performance

The following chart plots the cumulative performance of WTI for two portfolios:

  1. WTI (Strong Months) – this holds WTI in just the strong months identified above (February-June), and is in cash for the rest of the year
  2. WTI (Weak Months) – this holds WTI in just the weak months (September-January), and is in cash for the rest of the year

For benchmarking purposes WTI (continuous holding) and the S&P 500 Index are also plotted. All series are re-based to start at 100.

WTI Seasonality Performance [2000-2016]

Starting at 100 in 2000, the WTI (Weak Months) portfolio would have fallen to a value of 16 by 2016. The S&P 500 would have a value of 145, and a continuous holding in WTI a value of 182. But the WTI (Strong Months) portfolio would today have a value of 1047.


Further articles on oil.

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Tuesday reverses Monday

Do market returns on Tuesdays reverse those on Monday?

We first looked at this in 2013 (in this article), so time to see if anything has changed.

First, the following updates the chart to 2016 plotting Tuesday returns for the FTSE 100 Index split by whether the previous day’s returns were positive or negative. Two time periods are considered: 1984-2016 and 2000-2016.

For example, for the longer period, the average return on Tuesday when Monday was up is 0.02%, while the average Tuesday return when Monday was down is 0.09%.

FTSE 100 returns on Tuesdays when Monday was up-down

While the figures have marginally changed from the previous study in 2013, the overall finding is the same: namely that the theory that Tuesday reverses Monday does not seem to hold. Since 1984 it has done so when Monday returns have been negative, but not when they have been positive. 

As in the 2013 study, the theory has been valid for the market since 2000.

The previous study suggested that further analysis might include a filter on the size of the Monday returns. This is done in the following chart, where Tuesday returns are only considered if Monday’s returns were beyond a certain threshold (i.e. of a certain size). The (arbitrary) threshold chosen was 1 standard deviation for Monday’s returns.

FTSE 100 returns on Tuesdays when Monday was up-down (1SD filter)

It can be seen that limiting the analysis of Tuesday returns to just large movements on Monday (i.e. beyond 1 standard deviation) does help the reversal theory. In this case, if the market rises on Monday, then on average it falls the following day (albeit a pretty small average fall), and if the market falls on Monday, the market rises (fairly strongly) on the Tuesday.

Let’s now look at how the theory has been holding up in recent years.

Recent years

The following chart is similar in design to the previous charts, but this time it plots the reversal results for the discrete years 2013 – 2016.

FTSE 100 returns on Tuesdays when Monday was up-down [2013-2016]

First, when the market is up on Monday, all four of the past four years has failed to support the reversal theory as Tuesday has followed with positive returns as well. When Mondays are down, in three of the past four years Tuesdays have seen positive average returns (the exception being 2015).

Exploiting the reversal effect

OK, so how to exploit this?

The following chart plots the cumulative value of a portfolio that invests in the FTSE 100 just on Tuesdays when the previous day saw negative returns. For the rest of the time it is in cash.

In the 2013 study a variant portfolio was also considered, that as well as going long Tuesdays following negative Mondays also went short Tuesdays following positive return Mondays. There’s currently not much point in considering this as the reversal effect is not working for positive Mondays.

So, instead the variant second strategy studied here is as above (i.e. long Tuesday following a negative Monday) but with a 1 standard deviation filter applied to the Monday return (i.e. the strategy only goes long on Tuesday if the Monday negative return is a greater than 1 standard deviation return).

Strategies exploiting the Tuesday reversal effect [2000-2016]

Since 2000 it can be seen that the simple long Tuesday strategy out-performs the benchmark buy-and-hold FTSE 100 portfolio. The variant 1SD strategy only marginally out-performs the simple long Tuesday strategy, but does so with with a greatly reduced volatility.

 

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New 2017 edition of the Almanac just published

Almanac-2017-Cover

The new edition of the Almanac, The Harriman Stock Market Almanac 2017, has just been released.

The Almanac is a unique reference work providing traders and investors with the data to tackle the markets in the year ahead.

The 2017 edition is packed with new research. New strategies and studies appearing in the Almanac for the first time include-

New research

  • World’s Simplest Trading System ­ a simple trading system based on moving averages with an impressive performance.
  • Construction Sector 4M Strategy ­ exploits a seasonality anomaly of the construction sector.
  • Sell In May Sector Strategy ­ how to exploit the Sell in May effect with sectors.
  • Turn Of The Month Strategy ­ all the market’s gains occur in just six days around the turn of the month.
  • January Barometer ­ do the first five trading days of the year predict the full year?
  • Odd/even weeks ­ the market in odd weeks greatly out-performs that in even weeks.
  • Santa Rally ­ does a Santa Rally exist for shares and, if so, when does it start?
  • Santa Rally Portfolio ­ the 10 stocks that have had positive returns over the two-week Santa Rally period for every year since 2007.
  • Sell in May and come back…when? ­ if you sell in May when should you come back into the market?
  • Up/Down ratio ­ analysis of the correlation between the ratio of up/down days in a year and the overall annual return of the FTSE 100 Index.
  • Solar eclipse ­ do solar eclipses affect stock markets?
  • Dividend payment calendar ­ analysis of when FTSE 100 companies pay dividends throughout the year.
  • FOMC cycle ­ the equity premium in the US and worldwide is earned entirely in weeks 0, 2, 4 and 6 in FOMC cycle time.
  • The psychology of drawdowns ­ why investors may almost always feel a prevailing sense of loss.
  • Do European stocks follow the US on a daily basis? ­  analysis of the correlation of EuroSTOXX and S&P 500.
  • Fed rate cycle ­ analysis of the relationship between the Fed rate cycle and UK equities.
  • UK bank rate since 1694 ­ analysis of Bank of England base rate changes over the last three centuries.

Order your copy now!

 

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