Daily market momentum (up)

Posted on 15 October 2013 by Almanacist

The table below displays the results of analysis on daily market momentum – the tendency of the market to increase one day, having also risen the previous day(s).

Notes on the analysis–

The index analysed was the FTSE All-Share. The number of observations to September 2013 (from January 1969) was 11,284 days.
The first row (“Total”) displays the number of consecutive days that the index rose. For example, the market rose 5967 days (out of the total 11,284); 3346 times it rose on 2 consecutive days; and 318 times it rose 6 days in a row. The second row (“% Total”) expresses the first row as a percentage of the total sample. For example, the market rose 6 days in a row 2.8% of the whole period (11,284 days).
The rows “% 1 up” expresses the proportion of times that the market rose for n consecutive days following the market rising for 1 day (expressed as a percentage of the number of times the market rose once). For example: after the market had risen for 1 day, the market rose for a second day in 56.1% of all cases; after the market had risen for 1 day, the market went on to rise 6 days consecutively in 5.3% of all cases.
The subsequent rows display the tendency of the market to rise following n consecutive increases. For example: after the market had risen 4 days consecutively, the market rose for a 5^th day in 56.0% of all cases.

Frequency		0	1	2	3	4	5	6
Daily	Total	11284	5967	3346	1850	1033	578	318
	% Total		52.9	29.7	16.4	9.2	5.1	2.8
	% 1 up			56.1	31.0	17.3	9.7	5.3
	% 2 up				55.3	30.9	17.3	9.5
	% 3 up					55.8	31.2	17.2
	% 4 up						56.0	30.8
	% 5 up							55.0

Analysis for other frequencies (i.e. week, month, year) can be found in the Almanac.

Chancellors and the stock market

Posted on 11 October 2013 by Almanacist

Since 1945 there have been 22 chancellors of the exchequer, 14 of them Conservative and eight Labour.

Which chancellors were the most investor-friendly?

The chart on this page lists the 22 chancellors of the exchequer since 1945 with the years they were in office. For each chancellor, two values are plotted:

the percentage change in the value of the FTSE All-Share Index during their period in office, and
the above value adjusted by annualising, to allow for comparison of chancellors in office for different lengths of time.

Observations

Six chancellors left office with the market lower than when they started: three of these chancellors were Conservative and three were Labour.
The stock market suffered its worst period under the chancellorship of Alistair Darling (although it must be said that he did not inherit the soundest of economies).
The chancellor seeing the greatest rise in the market was Nigel Lawson, the market rose 141% during his time in office. That performance was followed by Denis Healey and Derrick Heathcoat-Amory.
However, looking at the annualised figures we see that the best chancellor for the stock market was Derrick Heathcoat-Amory (who become chancellor the same week that Jerry Lewis’ “Great Balls of Fire” was top of the hit parade).

Data

The data for the chart are below.

Chancellor	FTAS Rtn(%)	FTAS Rtn ann(%)
Hugh Dalton (Lab, 1945-1947)	12.1	5.2
Stafford Cripps (Lab, 1947-1950)	-6.1	-2.1
Hugh Gaitskell (Lab, 1950-1951)	12.7	12.5
Rab Butler (Con, 1951-1955)	35.0	8.4
Harold Macmillan (Con, 1955-1957)	-2.8	-2.7
Peter Thorneycroft (Con, 1957-1958)	-11.4	-11.6
Derrick Heathcoat-Amory (Con, 1958-1960)	82.6	32.4
John Selwyn Lloyd (Con, 1960-1962)	-13.2	-6.7
Reginald Maudling (Con, 1962-1964)	22.2	9.8
James Callaghan (Lab, 1964-1967)	20.5	6.6
Roy Jenkins (Lab, 1967-1970)	-0.6	-0.2
Ian Macleod (Con, 1970-1970)	0.2	2.5
Anthony Barber (Con, 1970-1974)	9.2	2.5
Dennis Healey (Lab, 1974-1979)	103.5	20.0
Geoffrey Howe (Con, 1979-1983)	57.4	14.0
Nigel Lawson (Con, 1983-1989)	141.4	22.2
John Major (Con, 1989-1990)	-4.1	-3.8
Norman Lamont (Con, 1990-1993)	36.6	14.7
Kenneth Clarke (Con, 1993-1997)	52.0	13.2
Gordon Brown (Lab, 1997-2007)	58.2	5.7
Alistair Darling (Lab, 2007-2010)	-17.9	-6.2
George Osborne (Con, 2010-)	26.8	8.0

The Stock Market in October

Posted on 1 October 2013 by Almanacist

October is the most puzzling of months for investors. On the one hand it has a reputation for volatility – and this is well deserved. Since 1984, seven of the 10 largest one-day falls in the market have occurred in October! The largest fall happening on 20 October 1987 when the FTSE 100 Index fell 12.2%. And, additional bad news for investors: since 1970 the average return in the month has been just 0.3%, ranking it 9th of the 12 months. However, things have changed in recent years.

The following chart plots the percentage performance of the FTSE All Share Index for each October since 1982. For example, last year in 2012 the market rose 0.9% in October. As can be seen, although the market occasionally suffers large falls in this month, for the most part the market posts a positive return. In fact, in the 20 years since 1993 the market has only fallen four times in October – this is a performance only bettered by December. So, October is a volatile month but also in recent years a profitable one for investors.

Six-month effect

One of the strongest – and oddest – anomalies in the stock market is the six-month effect (also known as the Sell in May or Halloween effects). This is where the market over the six-month period November to April greatly out-performs the market over May to October. The difference in performance is so marked that it is debatable whether it is worth even being invested in the market during the summer period. This behaviour, obviously, has not gone unnoticed. Many investors hold off investing in the market until the beginning of the strong six-month period in November. But, investing being a competitive sport, this can encourage investors to anticipate the rise in share prices and get in before the others in November. In other words, this anticipatory buying may be one of the reasons why October has been such a strong month in recent years: as the traditional late-year market rally occurs a bit earlier each 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.

Sectors

In the last couple of decades there have been no sectors that stand-out as consistently strong in the month, but weak sectors include: Construction & Materials, Household Goods and Life Insurance.

Diary

October is a quiet month for company results announcements and the only significant economics dates are the MPC interest rate announcement on 10 October and the FOMC meeting starting 29 October.

Article first appeared in Money Observer

The Stock Market in September

Posted on 2 September 2013 by Almanacist

After the summer lull, things can get exciting again for investors in September. Exciting and tricky. Since 1982 the FTSE All Share Index has on average fallen 1.1% in this month – the worst average return of any month in the year. And things haven’t improved recently: since 2000 the average return in September has been even worse at -1.9%.

The accompanying chart plots the percentage performance of the FTSE All Share Index for each September since 1982. For example, last year in 2012 the market rose 0.9% in September. However, as can be seen in the chart, the upside is fairly limited for this month and on the downside there is the potential for some large falls

In an average month for September the market tends to gently drift lower for the first three weeks before rebounding slightly in the final week – although the final trading day of the month has historically been one of the weakest of all months in the year.

Mid-cap stocks

But, however bad the month is for large caps, it is even worse for mid-cap cap stocks. On average the FTSE 100 Index out-performs the FTSE 250 Index by almost a full percentage point in September – making September the worst month for mid-cap stocks relative to the large-caps. This could be something to bear in mind this year: the FTSE 250 Index has risen 22% since the beginning the year against a rise of 12% for the FTSE 100 Index – the mid-caps could be due for a correction.

Sectors and stocks

In the last twenty years the sectors that have been strong in September have been: Pharmaceuticals & Biotechnology, Food & Drug Retailers, and Electricity. While on the other side, the weak sectors have been: Industrial Engineering, General Retailers, Chemicals, and Electronic & Electrical Equipment.

For stocks, the following companies have performed well in September over the last ten years: Ashtead Group, Diploma, and Carnival. These stocks have risen in at least eight of the past ten years in September – Diploma is the only stock in the FTSE 350 whose shares have risen nine times in September in the past ten years. The shares that don’t seem to like September are: Premier Farnell, Pace, and Compass Group – these three companies have each fallen in September in eight of the past 10 years.

Diary

Dates to watch this month are: 2 Sep – the NYSE is closed, 5 Sep – MPC interest rate announcement, 11 Sep – FTSE 100 Index quarterly review, 20 Sep – Triple Witching.

Article first appeared in Money Observer

The UK Stock Market in June

Posted on 3 June 2013 by Almanacist

The weakest month of the year

Since 1970 there are only three months in which the stock market has experienced on average negative returns: May, June and September. In the month of June the average return has been -0.9%. So, historically, this is not a good season for investors. The weak month of May is followed by the weakest month of the year – June.

The accompanying chart plots the percentage performance of the FTSE All Share Index for each June since 1982. For example, last year in 2012 the market rose 4.7% in June. But, as can be seen on the chart, that rise was against the trend, the market has only risen that one June in the past six years. And the market falls in June can be quite large; the market has fallen over 3% in June in eight years since 1982.

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.

In summary then, not a month to get excited about, which is why many investors decide to stay on the sidelines at this time of the year.

Sectors and stocks

Despite the overall weakness of shares in June, some sectors have tended to out-perform the market this month, these include: Pharmaceuticals & Biotechnology, Oil & Gas Producers, and Beverages.

At the stock level, two interesting companies are Halma and Synergy Health; these are the only companies in the FTSE 350 Index whose shares have risen every June for the past 10 years. The two worst performing shares in the month have been Rotork and United Utilities, both of which have fallen nine times in the past 10 years.

Diary

The year’s second quarterly review of the FTSE 100 Index will take place on 12 June. It is difficult to predict the outcome of the review a few weeks beforehand, but just at the moment companies looking possible candidates for ejection are Evraz, Polymetal International, and John Wood Group, to be replaced by Travis Perkins, Persimmon, and Intu Properties.

The results of the semi-annual review of the MSCI indices were announced in May, but their implementation date will be on 3 June. Like the FTSE review, this can have a significant impact on the individual shares involved. The MSCI indices may not be as well known as the FTSE indices in the UK, but many fund managers worldwide track them in preference to the FTSE.

The second Triple Witching of the year takes place on 21 June. And on the economic front, the MPC will make its interest rate announcement at 12 noon on 6 June. The FOMC will be meeting 18-19 June.

Article first appeared in Money Observer.

The UK Stock Market in May

Posted on 1 May 2013 by Almanacist

Second weakest month of the year

We are heading into the weakest two-month period in the year for the stock market. There are only three months where, since 1970, the market has an average return of below zero – May is one of them (the others are June and September). On average the market falls -0.3% in the month, and the probability of a positive return in the month is below 50%, at 45%.

The accompanying chart plots the percentage performance of the FTSE All Share Index for each May since 1980. For example, last year in 2012 the market fell 7.5% in May. As can be seen on the chart, the market has had a greater propensity to fall rather than rise in recent years.

In an average May the market trades fairly flat for the first two weeks of the month, and then prices drift lower in the second half.

So, generally, market performance in May justifies the saying, “sell in May and go away”. May is the start of the weaker half of the year (historically the market over November to April greatly out-performs the period May to October). Some short-term investors, therefore, tend to reduce exposure to the stock market from May.

Internationally, May is the weakest month of the year for the FTSE 100 Index relative to the S&P 500 Index; on average the UK index under-performs the US by 1.4 percentage points in May.

Sectors and stocks

Strong sectors relative to the general market in May tend to be Gas, Water & Multiutilities, Food Producers, Tobacco, and Electricity; while the weaker sectors are: General Industrials and Life Insurance.

At the stock level, an interesting company this month is AVEVA, which is the only stock in the FTSE 350 Index that has risen in nine of the past ten years in May. Conversely, the worst performing stocks in the month have been Old Mutual, Workspace Group, and Barclays, all of which have fallen in nine of the past ten years in May.

Diary

On the economic front, the MPC will make its interest rate announcement at 12 noon on 9 May. Any changes to the MSCI Index will be announced on 15 May in its semi-annual review (such reviews can have an interesting effect on stocks). And be aware the London Stock Exchange will be closed 6 and 27 May.

Finally, for those of an astrological bent, there will be an annular solar eclipse on 10 May and a penumbral lunar eclipse on 25 May. Of course, there can be no rational connection between the lunar calendar and the stock market, but research on recent data shows that the market does tend to be strong on days with a full moon!

Article first appeared in Money Observer.

Long term trend of the UK market

Posted on 25 April 2013 by Almanacist

If one looks at a long-term chart of the UK stock market, the line starts in the bottom left-hand corner and ends in the top right-ish corner of the chart. In other words, the trend over the decades has been up (albeit with a fair degree of volatility along the way).

Can this trend be analysed to give any clue to the future movement of the stock market?

1920 – 2013

The chart below plots the FTSE All Share Index from 1920 to the present day.

Notes:

The Y-scale is logarithmic (more suitable for long-term charts).
The straight line is a line of best fit calculated by regression analysis.

Observations:

The R2 for the line of best fit is 0.92, which is fairly high (i.e. the line of best fit fairly accurately approximates the real data points).
The FTSE All Share Index traded below the long-term trend line (line of best fit) from 1938 to 1984, and then traded above the trend line until 2008 (having only just stayed above it in 2003).

The equation of the line of best fit can be used to make forecasts for the FTSE All Share Index. (Although, with the assumption that the FTSE All Share and FTSE 100 indices are closely correlated, the forecast will be made for the FTSE 100 as that is the more closely followed index.)

The following table shows some forecast levels for the FTSE 100 Index as calculated by the trend line in the above chart.

Date	FTSE 100 Forecast	Chng from today(%)
Apr 2013	5,916	-8%
Dec 2018	8,374	30%
Dec 2023	11,367	77%
Dec 2033	20,949	226%
Dec 2063	131,087	1938%

At the time of writing the FTSE 100 Index is 6431, but the trend line forecasts a level for today of 5916 (i.e. the index would have to fall 8% to match the calculated trend value).

The trend line forecasts a FTSE 100 level of 8374 in December 2018 (an increase of 30% over its current level).

1946 – 2013

We will now look at a trend line calculated from data 1946 to 2013.

In this case the R2 is 0.96 – even better than the first chart. And a visual inspection confirms that the actual index tracks the line of best fit closer than in the previous chart.

The main difference is that this second trend line suggests the current level of the market is significantly below the long-term trend.

Again, the following table shows some forecast levels of the FTSE 100 Index as calculated by the trend line in the above chart.

Date	FTSE 100 Forecast	Chng from today(%)
Apr 2013	9,245	44%
Dec 2018	14,362	123%
Dec 2023	21,159	229%
Dec 2033	45,932	614%
Dec 2063	469,691	7,203%

In this case, the trend line from 1946 calculates a current level of the FTSE 100 Index of 9,245 (44% above the current actual level).

The trend line forecasts a FTSE 100 level of 14,362 in December 2018 (an increase of 123% over its current level).

Summary

Even if one does believe that the long-term-trend for the stock market will continue, the choice of start date for the long-term trend significantly affects the values forecast by the trend line.

The UK Stock Market in April

Posted on 2 April 2013 by Almanacist

Third strongest month of the year

April is one of the most interesting months for the stock market. Five years ago April was the strongest month for the market in the year, but it is now ranked third. On average the market rises 1.8% in this month; and the probability of a positive return in the month is 68% based on its recent track record. From 1971 the market rose in April every year for 15 years – a recent record for any month. Although the number of years with negative returns in the month has been increasing lately.

The accompanying chart plots the percentage performance of the FTSE All Share Index for each April since 1980. For example, last year in 2012 the market fell 0.6% in April. As can be seen, apart from 1990, the market falls rarely in April and when it does the extent tends to be limited.

The market often gets off to a strong start in the month – the first trading day of April is the second strongest first trading day of all months in the year.

Sectors

The following table summarises analysis of the historic performance of sectors in this month.

Strong sectors in April	Weak sectors in April
Industrial Engineering	Mining
Electronic & Electrical Equipment	Household Goods
Personal Goods	Software & Computer Services
	Mobile Telecommunications.

End of the strong half of the year

From a seasonality viewpoint, the great significance of April is that it the last month in the strong part of the six-month cycle. This is the very odd characteristic whereby the stock market in the period November to April greatly outperforms the May to October market (hence the saying, “Sell in May and go away…”).

In the 30 years since 1982 the winter period has out-performed the summer period 25 times, with an average annual out-performance of 9.1 percentage points! The behaviour is extraordinary and should not exist in a modern, efficient(ish) market. But exist it does. Indeed, a similar effect also exists in most other stock markets, including the US.
For investors impressed with this phenomenon (and it is difficult not to be), the end of April is the time to sell out, or reduce exposure to the equity market.

Diary

On the economic front, the MPC will make its interest rate announcement at 12 noon on 4 April (do you remember the old days when interest rates actually moved and those changes had an effect on the market?)

Finally, in the trivia corner, April marks the anniversary of the introduction of the FTSE 100 Index (on 1 April 1984) and of the first time the index closed over the 6000 level (1 April 1998).

Article first appeared in Money Observer.

The UK Stock Market in March

Posted on 1 March 2013 by Almanacist

March is a middling month for the market, ranking sixth of all months in performance. In the last 43 years, since 1970, the market has risen 28 years in March (a rate of 65%), with an average return of 0.7% in the month.

Strong sectors this month tend to be Industrial Engineering, Aerospace & Defense and General Retailers; while weak is the Gas, Water & Multiutilities sector. Historically, medium-sized companies have performed marginally better than large companies in March.

The following chart plots the percentage returns of the FTSE All Share Index for each March since 1980. For example, last year in 2012 the market fell 1.4% in March.

As can be seen, although on average the market increases in March, there have been the occasional large falls. The general trend for the market in March is to rise for the first three weeks and then fall back in the final week (in fact, the final last week of March has historically been one of the weakest in the whole year).

The year’s first quarterly review of the FTSE 100 Index will take place on 6 March. This is when the index is re-balanced and companies can be added to the index (following which their share price often falls) or ejected from the index (following which their share price tends to rise). It is difficult to predict the outcome of the review a few weeks beforehand, but just at the moment companies looking possible candidates for ejection are Serco, Melrose and John Wood, to be replaced by easyJet, London Stock Exchange and Direct Line Insurance.

The first Triple Witching (when the expiry of futures and options converge on the same day) of the year takes place on 15 March. Volatility can increase around this day, while in recent years the return on the FTSE 100 Index on the Triple Witching day itself has been significantly greater than other days.

Easter falls at the end of the month (the LSE will be closed 29 March and 1 April), when we might see an interesting market anomaly called the holiday effect. Academic studies have found that the market tends to be abnormally strong on the days immediately before and after holidays.

The big economics event in March will be the chancellor’s Budget, scheduled for 20 March. The other significant date of the month will be the 7 March MPC interest rate announcement at 12 noon.

Article first appeared in Money Observer.