A very average start to 2017

The following chart plots the daily returns of the FTSE 100 Index for the nine days around Christmas and New Year.

The blue bars plot the average daily returns of these days for the period 2000-2016. The orange bars plot the daily returns for the last nine days.

FTSE 100 Index daily returns around Christmas and New Year [2017]

As can be seen the actual daily returns for the last nine days have been on the whole pretty close to the average daily returns seen for the last 16 years..

  • Strong returns have been seen on the trading days following Christmas and New Year.
  • After the first day after New year, returns have trailed off (days 8 and 9 in the chart).
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The Stock Market in January

The performance of the stock market in January has changed dramatically over time. From 1984 to 1999 the average FTSE All-Share return in the month was 3.3%, and as can be seen in the accompanying chart in those 16 years the market only fell twice in January. But then things changed completely. Since year 2000 the average market return in January has been -1.6% with the market seeing positive returns in only six years. This makes January the worst of all months for shares since 2000.

Monthly returns of FTSE All Share Index - January (1984-2016)

In an average January, the euphoria of December (the second strongest month of the year) carries over into the first few days of January as the market continues to climb for the first couple of days. But by around the fourth trading day the exhilaration is wearing off and the market then falls for the next two weeks – the second week of January is the weakest week for the market in the whole year. Then, around the middle of the third week, the market has tended to rebound sharply.

January Effect

In the world of economics the month is famous for the January Effect. This describes the tendency of small cap stocks to out-perform large caps in the month. This anomaly was first observed in the UK, but it certainly seems to apply to the UK market as well. For example, since 1999 the FTSE Fledgling index has out-performed the FTSE 100 Index in January in every year except two. The interesting thing is those two weak years for small-caps were seen in January in the last two years – 2015 and 2016. Is this effect on the wane?

Turning to the longer-term, what is the outlook for the rest of the year?

Outlook for 2017

One of the strongest influences on the US stock market is the four-year Presidential Election Cycle. Historically presidents have primed the economy in the year before elections, resulting in the third year of the Presidential Election Cycle seeing higher annual market returns. By contrast, the first (which will be 2017 in this cycle) and second years have seen lower than average returns. Given the close correlation of the US and UK markets this would suggest a somewhat negative outlook for UK shares in 2017.

What other patterns can we find from history for the likely performance of the market in 2017? Well, we could look at the decennial cycle. Since 1800 the average annual return in the seventh year of the decade has been a reasonable 2.7%; but since 1950 the seventh years have been on quite a run: the average annual return has been 16% and the last time the market fell in a 7th year was 1957. The guidance from the centennial cycle is mixed; in 1717, 1817 and 1917 the respective annual returns for the UK market were +18%, +5%, -11%. In the Chinese calendar, it will be the year of the rooster, this is not a good sign for stocks. Since 1950, rooster years are the only Chinese zodiac years that have had a negative average annual return (of -4%). So, good luck if you are trading against the rooster!


Article first appeared in Money Observer

Further articles on the market in January.

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Average market behaviour in January

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

Average month chart for January [1985-2016]

As can be seen, historically the market tends to rise for the first two or three days in January and then sells off quite strongly over the following two weeks. The second week of January is the weakest week for the market in the whole year. Then, around the middle of the third week, the market has tended to rebound sharply.


Other articles about the market in January.

 

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100 years of the FTSE All-Share Index since 1917

The following chart plots the annual returns of the FTSE All-Share Index for the 100 years from 1917 to 2016.

One Hundred Years of the FTSE All-Share Index [1917-2016]

The final bar in the chart plots the annual return for the index in 2016 (+12.3%). The Y-axis is truncated at +/-50% for legibility. In two years the returns were outside this bound: in 1974 the index fell 55%, and in 1975 the index rose 136%.

Over the 100 years since 1917 the average annual return for the index has been +7.0%.

The standard deviation has been 21.5, which means that for 66% of the years the return was between -14.5% and +28.5%.

The index saw positive returns in 65 of the 100 years.

The following chart is similar to the above, but ranks the returns in order of size.

One Hundred Years of the FTSE All-Share Index - ranked by return [1917-2016]

The return of 12.3% in 2016 ranks 35th in order of annual returns for the index in the last 100 years.

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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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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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