High, Low, Close

Analysis of the daily close  of the FTSE 100 Index and the day’s high and low. 

The following table shows the frequency with which the FTSE 100 closes within a certain percentage of the high (or low) of the day. For example, since 1985 the FTSE 100 Index has closed within 10% of its daily high 20.8% of all days, and it has closed within 1% of its low 5.6% of all days.

  10% 5% 1%
Top (%) 20.8 15.1 9.8
Bottom (%) 14.5 9.6 5.6

It’s interesting to note that for one in 10 days the index closes within 1% of its high for the day.

The following day

Continuing this analysis of where the index closes relative to the Hi-Lo range of the day, the following table shows the performance of the FTSE 100 Index on the following day.

For example, on the days when the index closes within 10% of its low for the day on average the index return is -0.005% the following day; and when the index closes within 1% of its high for the day on average the index return is 0.167% the following day.

  10% 5% 1%
Top (%) 0.111 0.132 0.167
Bottom (%) -0.005 0.001 0.013

 


The above is an extract from the Harriman Stock Market Almanac 2017.

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Sell Rosh Hashanah, Buy Yom Kippur

In 1935, the Pennsylvania Mirror referred to a Wall Street adage, “Sell before Rosh Hashanah; buy before Yom Kippur”. Recently an academic paper quoted this article and set out to establish if the adage was true and still valid today.

The theory is that the market is weak during the approximately seven trading-days gap between the Jewish New Year (Rosh Hashanah ) and the Day of Atonement (Yom Kippur). To test this theory the authors studied the results of short-selling the Dow Jones Industrial Average on one of the three days before Rosh Hashanah and buying back on one of the three days following Yom Kippur. They analysed the nine different combinations of trade dates, i.e. selling on the third day before Rosh Hashanah (R-3) and buying back on the day after Yom Kippur (Y+1), R-3 and Y+2, R-3 and Y+3, R-2 and Y+1 etc. The period tested was 1907 to 2008.

The paper found that the mean returns for the DJIA for the nine trade dates considered ranged from -0.47% for R-3 and Y+2 (i.e. shorting three days before Rosh Hashanah and covering two days after Yom Kippur) , to -1.01 for R-2 and Y+1.

In other words, they found that the market had indeed been weak between the two Jewish holidays, and that five of the nine scenarios yielded statistically significant results. They checked to see if this Jewish Holiday Effect might have diminished in recent years and found that the effect over 1998-2008 was actually stronger for six of the nine trade scenarios than for the prior period 1907-1998.

So, what’s the reason for this?

The authors of the paper found that this was not a result of the influence of other anomalies (e.g. the weekend effect), nor was it the result of data outliers. One Wall Street trader gave the traditional explanation that people of the Jewish religion “wished to be free (as much as possible) of the distraction of worldly goods during a period of reflection and self-appraisal.” Of course Jewish traders are only a small part of the market, but at the margin their withdrawal from the market over this period may increase volatility and risk and thus discourage others from trading, and then the arbitrage traders exploiting the effect can make it self-fulfilling.

Is this a peculiarity of just the US market, or is the effect present in other markets?

The above cited paper starts by quoting a 9 September 1915 New York Times article titled “The London Market Quiet – Jewish Holiday Causes Small Attendance on the Exchange”, the newspaper reported that money and discount rates on the London Stock Exchange were “easy today” and attendance at the exchange was low due to the Jewish holiday of Rosh Hashanah.

So, might this effect still be in force in the London market today?

The following chart shows the mean returns for the FTSE 100 Index for the nine combinations of trade dates (as above) for the period 1984-2013.

Average FTSE 100 returns for period between Rosh Hashanah and Yom Kippur [1984-2015]

As can be seen, the market was weak for all nine combinations of trade dates over the Rosh Hashanah to Yom Kippur period. The weakest combination was for selling on the third day before Rosh Hashanah and buying back on the second day after Yom Kippur (T2) when the mean return has been -1.3%.

The Jewish Holiday Effect would therefore seem to be as strong in the London market as that in New York.


The above is an extract from the Harriman Stock Market Almanac 2017.

 

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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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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.

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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S&P 500 daily returns heatmap

This updates a previous article with the latest figures for the average daily change and positive daily returns of the S&P 500.

The table formatting and analysis is largely as before; except the charts now use a smoother gradient of colours to indicate number magnitude.

Average daily returns

S&P 500 average daily returns heat map [2015]

Positive daily returns


Other daily return heatmaps.

 

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FTSE 100 daily returns heatmap

This updates a previous article with the latest figures for the average daily change and positive daily returns of the FTSE 100 Index.

The table formatting and analysis is largely as before; except the charts now use a smoother gradient of colours to indicate number magnitude.

Average daily returns

FTSE 100 average daily returns heat map [2015]

 Positive daily returns

FTSE 100 positive daily returns [2015]


Other daily return heatmaps.

 

 

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First trading day of February

Next Monday will be the first trading day (FTD) of February.

Since 1984, the FTSE 100 Index has risen on average 0.56% on the first trading day of February. The index has had a positive return on this day in 58% of years since 1984.

Since 2000, the performance has been even stronger on the February FTD, with an average return of 0.80% on the day, and with positive returns seen in 75% of years (making it the second strongest month FTD of the year).

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

First trading day of February (1984-2015)

 

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Last trading day of January

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

Since 1984 the market has on average risen 0.14% on the LTD of January, with positive returns in 58% of all years (although since 2000 this has fallen to just 31%).

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

Last trading day of January (1984-2015)

 

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Do the first five days predict the full year?

The January Effect refers to the tendency of small cap stocks to out-perform large-cap stocks in the month of January. However, the term January Effect is used rather loosely to also refer to stocks generally being strong in the first month of the year, and also to how the direction of the market in January forecasts the market direction of the whole year (this latter effect is also termed the January Barometer). [A previous article explained the multiple January Effects in greater detail.]

Here, we are going to look at a variant of the January Barometer to see if the first five days of the year predict the return for the whole year.

First, we will call this variant of the January Barometer: January Barometer (5D).

The bald figures don’t look encouraging: in the 46 years since 1970, the January Barometer (5D) applied to the FTSE All-Share Index has been right in 26 years (57%). In other words in just over half the years since 1970 the first five days of the year have accurately forecast the full year.

But let’s look at this in more detail and see if we can tease anything out of the figures

The following is a scatter chart that plots the return on the FTSE All-Share Index for the first five days of a year against the return for the full year, for the period 1970-2015.

FTSE All-Share Index first 5-days v full year return [1970-2015]

There is a positive correlation here (given by the positive sloping trend line), however the measure of correlation (R2) is very low.

Summary: the chart shows there is a very low level of correlation between first five-day returns and returns for the full year but it is far from being significant.

However, strictly, the January Barometer only says the direction (i.e. positive or negative returns) can be forecast, not the size of returns. In which case the following chart may be more useful. This plots a binary value for each year:

  • 1: if the sign on the full year return was the same as the sign for the return for the first five-days (i.e. either both positive returns or negative returns)
  • -1: if the sign on the full year return was different to the sign for the return for the first five-days

FTSE All-Share Index first 5-days predicts full year [1970-2015]

In this chart we can see the roughly even split between years when the January Barometer (5D) works and those years when it doesn’t. However, the distribution of years when it works is interesting, as there does appear to be a certain clustering of years when the effect works and when it doesn’t.

For example, in the last 20 years the January Barometer (5D) has been accurate 14 times (a hit rate of 70%). And since 2004 there is this rather odd pattern of not working every fourth year.

US presidential elections

US presidential elections also have a four-year cycle. On the chart presidential years are marked with orange bars.

It can be seen that since 2004 the January Barometer (5D) has worked every year except in years before presidential elections.

And, over the longer term, since 1970 the January Barometer (5D) has only failed in three presidential elections (a success rate of 73%).

The outlook for 2016

Generally, the January Barometer (5D) has a low success rate. However, the effect has been more significant in recent years; plus it has a higher significance in US presidential election years (which 2016 is). In 2016 the market was down in the first five days of the year, and so the January Barometer (5D) would forecast a down year with a 73% probability.

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