Stock trends can work if spotted early
Stock market investors hoping that adages and simplistic trading patterns offer a chance to make easy profits may have to dig a little deeper — and act faster — in an age of increasingly efficient markets.
Analysts say that many trends like “Sell in May and Go Away” work only half the time, but this does not stop them looking for new patterns: being the first to spot a trend should still pay dividends.
The S&P 500 .SPX has fallen 43 percent to date since the start of 2008, yet a Goldman Sachs study recently showed that in this period the cumulative gain from holding the S&P between 2 p.m. and 4 p.m. has been 35 percent.
In contrast, the cumulative loss from holding the S&P between 9.30 a.m. and 2 p.m. is 54 percent.
So, it’s quite simple. Just buy at 2 p.m. and sell at 4 p.m. And even better if you could short the index at 9.30 a.m., and buy it back at 2 p.m.
But the efficient markets hypothesis says that while trends like this exist the problem is that as soon as people find out about them, they disappear.
Prices would rise in anticipation of investors buying shares, and fall ahead of 4 p.m. in expectation of their exit.
“If the trend was really as strong as Goldman Sachs says it is, I don’t understand why they told anybody,” says UK-based stock market historian David Schwartz instant faxless payday loans.
“I have trends I trade all the time. And I write columns, I don’t tell anybody about the really good stuff that works for me,” he said.
MAY OR MAY NOT WORK
UK investors are familiar with the mantra “Sell in May and Go Away — Come Back on Leger Day,” which suggests they should dump stock and stay out of markets from May to just before the St Leger horserace in September, when prices purportedly rise.
Analysts say “Sell in May” only works half the time — meaning investors are no more likely to be better off as a result of following it than they would be than buying and selling in any other four-month period of the year.
Data shows that only twice in the last decade has the index fallen between mid-May and mid-September in the same year as it rose for the year as a whole.
Even though the index has fared disproportionately badly in seven out of 10 years in the May-September period, it is not enough to convince analysts that such adages work.
“If they worked, you wouldn’t need fund managers,” said Frances Hudson, Global Thematic Strategist at Standard Life Investments.
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