Blogvesting

The finance literature is littered with examples of many calendar effects in the stock market; the following is a partial list :

• The weekend effect : The mean return from buying stocks on Friday and selling them on Monday is larger than buying stocks on Monday and selling on Friday. This is especially unusual since the Mon-Fri period spans 4 days and entail more risk than the Fri-Mon 3 day period. This effect is usually explained by short-term traders dumping stocks on Friday to avoid holding them over the weekend, and retail investors doing their research over the weekends and placing buy orders on Monday.
• The year-end effect : Stock prices tend to drop in the last days of December due to tax loss selling and portfolio window-dressing by professional managers selling losing stocks. The drop is rapidly reversed in January with many investors “wiping the slate clean” in their minds and placing new buy orders, and professional managers re-purchasing the same stocks they sold in December.
• The October effect : Many of the most severe stock market declines have occurred in October, including the Panic of 1907 (Oct 1907), the Great Depression (starting Oct 1929), Black Monday (Oct 1987), and the Panic of 2008 (Oct 2008).

The October effect is also known as the Mark Twain effect, which comes from the following quotation in Twain’s novel Pudd’nhead Wilson : “October. This is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August, and February.”

In general, these calendar effects have become much less consistent since their publication, and have tended to shift into adjacent days/months as traders take advantage of them. Most academic studies now agree that it is difficult to systematically take advantage of these effects today. However, it seems to me that in general, the autumn months are bad for stocks. There is something about the turning of the seasons and the falling of the leaves that makes greed wane and makes fear wax and brings on seasonal affect disorder. I think that there truly is a greater-than average chance of a black swan event in the autumn months due to the physiology of humans. The only recent significant decline in the stock market that has not happened in autumn is the bursting of the dot-com bubble, which happened in March 2000, and even that was a very gradual decline. Of course, I realize that I may be subject to the proximity effect, which makes more recent events seem more significant, but you can bet that when the next autumn rolls around, I’ll be scouting for some cheap put options to tide me through those months.