Calendar Effect Definition
Calendar Effect Definition
If you read the financial pages for any period of time, a sense of déjà vu is inevitable. As one
year turns into the next, the same features recur. In particular, you may have noticed articles
discussing so-called “calendar effects”. These hold out the promise of beating the market by
making well-timed exits from (and entrances to) shares based on established historical patterns.
But do such short cuts to investment outperformance really exist? Can a desk diary hope to
replace the ubiquitous Bloomberg terminal as the canny investors analytical tool of choice?
As late April shades into early May, news editors are no doubt busy commissioning articles reminding investors of the old injunction to “sell in May and go away, dont come back until St. Legers Day”. This old saw rests on historical data suggesting that returns from the stock market between October and April tend to be impressive, while those between May and September are often underwhelming. (For those of you who choose not to follow such things, the St Leger Stakes are run at Doncaster each September and apply a full stop to the flat-racing season and, by extension, the British
summer.) The explanation given for this pattern is that investors tend to be away from their desks during the summer months, leaving fewer buyers to bid up share prices.
After a strong run in markets since last September (the FTSE 100 is up by more than 8% since last St Legers Day), the temptation to lock in profits this May will no doubt be strong. Sadly, while the “sell-in-May” axiom is nice in theory, it doesnt work quite so well in practice; history doesnt always repeat itself. To take just one recent example, the UK market rose by 22% in 2009. Within that, however, it rose by 21% between May and September. In that instance, following a seasonal trading strategy would have deprived you of much of the markets post-crisis recovery.
But “sell in May” isnt the only chestnut youll find doing the rounds. For example, some data seem to suggest that Monday is the worst day of the week for equity returns; if thats the case, committing your life savings to the stock market when the opening bell sounds on a Monday morning might not be a good idea.
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