The Atlanta Journal-Constitution ^ | Nov 29, 2006 | Tom Walker
Posted on Mon Dec 04 2006 14:11:26 GMT-0600 (Central Standard Time) by FLOutdoorsman
If you've always suspected there's a little lunacy in the stock market, now there's proof.
It's the full moon, of course, which legend says brings on depression and pessimism, not to mention werewolves. If that's true, presumably it would also trigger a gloomy outlook about future cash flows, causing investors to take fewer risks, and stock prices to fall.
"We find strong lunar cycle effects in stock returns," say University of Michigan Business School professors Ilia D. Dichev and Troy D. Janes in a research report.
"Specifically, returns in the 15 days around new moon dates are about double the returns in the 15 days around full moon dates. This pattern of returns is pervasive," they report.
The scholars set out to examine the folk wisdom that moon cycles affect human behavior, especially abnormal behavior around full moons. They turned to stock markets to get a big enough sample, as millions of people make billions of trades on a regular basis.
They gathered data on major U.S. stock markets over the past 100 years, and on the markets of 24 other nations going back 30 years.
"Taken as a whole, this evidence is consistent with popular beliefs that lunar cycles affect human behavior," the researchers concluded.
The Harvard Business Review, reporting the research in its current issue, says that while these findings "are a bit off the beaten path, they're the product of rigorous research."
"So even though we might not be ready just yet to consult lunar cycles for guidance on all our stock trades and other major decisions," the Harvard Business Review says, "we should keep in mind that unexpected sources can beget robust data and analysis, and that correlation and causality must be carefully examined."
Long list of indicators
Indeed, lunar cycles are not the only phenomena that investors have consulted over the years for a leg up in the market. Many bizarre and sometimes seemingly logical schemes have emerged, either for general or specific guidance.
Generations of astrologers have probed the planets and stars for clues to which way the market will go. Others advocate various versions of cycle theory — the idea that stocks move in regular and predictable up-and-down patterns.
The most famous cycle theorist, perhaps, was a Russian, Nokolai Kondratieff, who saw the markets moving in long waves of about 50 years. Unfortunately, he was arrested and sent to the Soviet Gulag, where he apparently was executed in 1938.
There are other principles:
•There's the "skirt length theory," which holds that the market rises and falls in tempo with the ladies' hemlines. Shorter skirts appear when times are good, according to the theory, reflecting confidence and leading to bullish markets.
•And, of course, there's the "Super Bowl theory," which holds that a win by a team from the old American Football League (now the AFC) foretells a declining market for the coming year, while a win by an old National Football League team (the NFC division) means stocks will be up.
•The "presidential election cycle" actually has considerable credibility on Wall Street. This is the thesis that the market is weakest in the first two years of a presidential term, when the White House occupant is most likely to make enemies. The last two years of the term are the strongest, as the president promotes policies aimed at boosting the economy and the markets at election time.
Behavioral psychology has also contributed theories of market movements.
A pair of psychologists at Princeton University in New Jersey recently concluded that stocks with names that are easy to pronounce consistently outperform those with more confusing names.
Adam Alter and Daniel Oppenheimer asked undergraduates to grade the fluency of 89 stock names on a sliding scale. The professors then checked the stocks' performances.
As expected, "the more complex a share's name, the poorer it performed on the first day of trading." This effect appeared to wane over time, however, as more information about the companies became available to investors.
The professors warned, however, that name alone shouldn't be used to predict the performance of an individual stock.
Watching the Fed chief
Everybody knows, of course, that when the Federal Reserve speaks, everybody listens. Remember Alan Greenspan?
"Any remark, whether expected or surprising, can send the bond and equity markets soaring or falling," Lord Abbett senior analyst Kathleen Madigan says in a recent study. "New Fed Chairman Ben Bernanke found this out when in the spring a remark he made to a reporter at a dinner party caused a sharp sell-off in equities and bonds."
Can a savvy investor watch the news and move fast enough to gain an advantage on comments by Fed officials, especially the chairman?
To be sure, Fed-speak causes the markets to squiggle, but it's likely to be a short-term event, Madigan says. At least 25 percent of the time stock and bond movements are one-day affairs.
"The lesson here is that keeping an eye on the long term remains the best investment strategy," Madigan writes. "The examination of market performance and Fed speeches suggests that market fundamentals such as the outlook for profits, economic growth and inflation still are the best drivers of market performance."