price patterns, charts and technical …people.stern.nyu.edu/adamodar/pptfiles/invphiloh...price...
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PRICEPATTERNS,CHARTSANDTECHNICALANALYSIS:TEMPORALPATTERNS
AswathDamodaran
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SeasonalandTemporalEffectsonPrices
• Empiricalstudiesindicateavarietyofseasonalandtemporalirregularitiesinstockprices.Amongthemare:– TheJanuaryEffect:Stocks,onaverage,tendtodomuchbetterinJanuarythaninanyothermonthoftheyear.
– TheWeekendEffect:Stocks,onaverage,seemtodomuchworseonMondaysthanonanyotherdayoftheweek.
– TheMid-daySwoon:Stocks,onaverage,tendtodomuchworseinthemiddleofthetradingdaythanatthebeginningandendoftheday.
• Whiletheseempiricalirregularitiesprovideforinterestingconversation,itisnotclearthatanyofthemcanbeexploitedtoearnexcessreturns.
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A.TheJanuaryEffect
¨ StudiesonreturnsonstocksindicatethatreturnsinJanuaryarehigherthanreturnsinanyothermonthoftheyear,byawidemagnitude.
¨ Specifically,acrossallUSstocks,theaveragemonthlyreturninJanuaryhasbeen3.26%,between1926and2018,whereastheaveragemonthlyreturnforFebruary-Decemberhasbeen0.95%.
¨ Moregenerally,thereseemstobeevidence(albeitweaker)thatthestrongerthereturnsinJanuary,thebetterthereturnswillbefortheyear.
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TheJanuaryeffectisstrongestforsmallcapstocks
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January February-December
AverageMonthlyReturns:USStocksfrom1926-2018
SmallestCapDecile
Market
LargestCapDecile
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Anditisstrongacrossinternationalmarkets
!
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Potentialexplanations
¨ TherearethreepossibleexplanationsfortheJanuaryeffect:¤ Fundflows:Itispossiblethatinvestorswithdrawcashcollectivelyfrom
stocksinDecemberandinvestmoneybackintostocksinJanuary.¤ Windowdressingbyinstitutions:Institutionsmayselllosingstocksin
DecemberandbuythembackinJanuary.¤ Taxselling:InvestorsmaysellinDecemberfortaxreasonsandbuy
backinJanuary.¨ ThefactthattheJanuaryeffectisstrongestforsmallcap
stocksindicatesthatwhateverthereasonforithastobestrongerforsmallercompanies(whichtendalsotohavelessfollowedbyanalystsandthereforehavemoreinformationcomingfromthecompanies).
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B.TheWeekendEffect
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TheWeekendEffectinInternationalMarkets
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Hasitheldup?
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TheWeekendEffect:Explanations
¨ TheMondayeffectisreallyaweekendeffectsincethebulkofthenegativereturnsismanifestedintheFridayclosetoMondayopenreturns.ThereturnsfromintradayreturnsonMondayarenottheculpritsincreatingthenegativereturns.¤ Mondayeffectisworseforsmallstocksthanforlargerstocks.¤ Mondayeffectisnoworsefollowingthree-dayweekendsthantwo-day
weekends.¨ Therearesomewhohavearguedthattheweekendeffectisthe
resultofbadnewsbeingrevealedafterthecloseoftradingonFridayandduringtheweekend.
¨ Thereisevidencethattheweekendeffectgetsweakerforstockswhereshortsellingand/orputoptionsisavailable,allowingtraderstotradeaheadoftheMondayopen.
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C.IntradayPriceeffects
¨ Asresearchersgetaccesstointradayprices,theyarefindingpatternsinstockpricesduringthecourseoftheday,withsomeclaimingtofindevidenceofamid-daymarketswoonandothersfindingevidenceofpricepatternsatthestartandendoftradingdays.
¨ Thesepatterns,eveniftheyexist,aredifficulttoexploitforstand-aloneprofitsbutmayallowinvestorstoaugmentprofitsfromothertradingstrategies.
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TemporalEvidenceandInvesting
¨ Therearetimepatternsinstockprices:Whilemuchtimeandefforthasbeenspentchroniclingthepresenceoftemporaleffectsonstockprices,thebottomlineisthatthereislittleevidencethatinvestorshavebeenabletoexploittheseeffectstomakemoney.
¨ Butmakingmoneyonthesepatternsseemstobedifficult:Infact,attemptstoexploitthefactorsseemstoreducetheirpotency,suggestingthattemporaleffectshavelesstodowithmarketefficiencyandmoretodowithmarketmicrostructureandinformationpatterns.