superstitions

Stock Market Superstitions

December 29th, 2015 by

superstitionsFundamental guidelines, technical analysis, Fibonacci, Elliott Wave. There are countless methods used to try and anticipate which way the markets will move. Not surprisingly, a number of superstitions have worked their way into Wall St. lore.

Are they all just “silly superstition,” or is there a grain of truth behind them?

 

Boston Snow Indicator

640px-Downtown_Crossing_Boston_Massachusetts_in_Winter_SnowLet’s start with a couple of winter-related superstitions.  One lesser known superstition is the “Boston Snow Indicator.” This states that if Boston has a white Christmas, stocks will rise the next year.

FALSE: There is no correlation between snow in Boston on December 25th, and the performance of the stock market the following year. Given how many times it snows in December in New England, you could probably cherry pick occasions where this bit of folklore was true, but it’s just coincidence.

 

Santa Claus Rally

santa-claus-rallyFirst postulated in 1972 by the Stock Traders Almanac, the Santa Claus Rally is an expected rise in stock prices in December. Some traders only count the last week of trading for the year between Christmas and New Years as being the Santa Claus rally.

TRUE: The Wall St. Journal notes that if you count only the trading sessions between December 24 and January 3, the Dow has performed better than average. Some causes may include investing Christmas bonuses and fund managers loading up on the best performing stocks so their portfolio looks good at year-end.

However, this comes with a caveat: Like many other Wall St. superstitions, the changing nature of the way the market works has blunted the correlation of this legend and market performance. Individual investors are now a much smaller portion of the market than in the past. Also, you have traders trying to front run the Santa Claus rally, which pushes the actual rally further up the calendar to before Thanksgiving.

The January Effect(s)

calendar-152139_640Building off the Santa Claus Rally is the January Effect. This states that stocks (especially small caps) gain in the first half of January. This effect was first noticed in 1942 by investment banker Sidney B. Wachtel.

TRUE: While not as reliable as in the past, there is still some correlation. Tax-related selling in December can depress prices, setting up some bargain hunting after New Years. Year-end bonuses are usually paid the first week of January, which may find its way into the market. One reason this January Effect isn’t as strong as before is the increased popularity of tax sheltered retirement plans.

The second January Effect, also known as the January Barometer, is better known as “As goes January, so goes the year.” The theory is that January sets the pace of the market for the rest of the year.

TRUE: Various sources cite an accuracy from 92.5%, to 73%. Again, the transformation of the stock market away from individual human investors to High Frequency Trading computers and large institutional traders has brought down the accuracy of this indicator.

Sell in May, and Go Away

horse-raceOne of the more famous stock market superstitions began in Britain. The phrase goes “Sell in May, and go away. Don’t come back ’till St.Leger’s Day.” Most Americans have never heard of St. Leger’s Day, and don’t know the significance. St. Leger’s Day is the second Saturday in September. This is the date of a major horse race in England, the St. Leger’s Stakes. (think of it as the British version of the Preakness, or Kentucky Derby.)

This superstition looks to bypass the summer doldrums, when stocks historically languished. The idea was to sell high in May, then buy low in September.

TRUE: At least until 2000, this was actually a reliable guide. According to the American Stock Trader Almanac, Buying stocks in September 1950 and selling them in May  2004 would have produced a $476,000 profit on $10,000. This correlation was broken around 2000, when institutional investors and fund managers became the controlling factors in the market.

Super Bowl Indicator

super bowlThis superstition says that if the NFC wins the Super Bowl, stocks will rise the next year. If the AFC team wins, stocks will fall.

TRUE: As far as stock market superstitons go, this indicator has been pretty accurate over time. There are two big exceptions: the AFC’s streak of championships during an economic expansion from 2004 through 2007, and the 2008-2009 global financial crisis. Through 2014, the Super Bowl Indicator has been right 37 out of 48 times — a 77% success rate.

 

Presidential Election Effect

USPresidentialSealFrom one of the most accurate superstitions, we go to the least accurate. Some pundits say that the party that wins the White House indicates which way the stock market will turn. Republicans naturally say that the economy fares better when a pro-business Republican wins the White House, while Democrats say the opposite. While the Stock Traders Almanac says that markets have shown a better average return under Democratic Presidents since WWII, individual results show little to no correlation.

 

The Hemline Index

dressOne of the most light-hearted stock market superstitions is the Hemline Index. First described in 1926, it says that the market goes up and down with the hemlines of womens’ skirts. As one early trader put it, “Bull market, bare knees.” Some theorize that women feel happier during good times, and buy fashionable wear. When times turn rough, they fall back to longer, more sober attire (or just can’t justify party clothes and working clothes.)

TRUE:The Wikipedia entry for miniskirts seems to back up this theory. The decades that miniskirts get shorter seem to correlate with good economic times. Of course, this idea originated in more sexist times, and even if true, it shouldn’t be touted in public.

Leading Lipstick Indicator

lipstickOne of the more obscure superstitions is the “Leading Lipstick Indicator.” Introduced by Leonard Lauder, the chairman of Estee Lauder makeup empire, it says that in an economic downturn, women who can’t afford to indulge in new shoes or handbags will buy more lipstick instead.

MIXED: The Leading Lipstick Indicator was somewhat accurate in the years immediately after its inception. However, changing fashion tastes and increased quality of lower cost makeup over the last few years has led to Estee Lauder’s sales figures not tracking the economy as much as before.

Sell on Rosh Hashanah and buy on Yom Kippur

star-of-davidWe end our review of stock market superstitions with perhaps the most obscure one of all, but one that is surprisingly accurate. Following the same theory of “Sell in May,” but on a micro scale, this superstition says to sell on the Rosh Hashanah, the first day of the Jewish New Year. Rosh Hashanah for 2015 was from sunset on September 13 to nightfall on September 15.

Then, on Yom Kippur, you buy back the stocks you sold on Rosh Hashanah. Yom Kippur (the Day of Atonement) for 2015 occurred from sunset on September 22, through nightfall on September 23.

TRUE: Jewish holidays follow a lunar calendar, so the date moves on the Gregorian calendar. Still, it often falls in September. Since September is statistically one of the worst months of the trading year, limiting your exposure during this time can reduce your exposure to downturns in the market.

Superstitions Are Not Investment Strategies

ouija

 

While these stock market superstitions are fun to talk about and fuel our desires to predict the market, they have a pretty bad record on the whole.  Take Stevie Wonder‘s advice:

“When you believe in things that you don’t understand,
Then we suffer,
Superstition ain’t the way.”

 

The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product.