I am offering the online chapters of the book using "The Honor System." Tip options at the bottom of the page.
You flip a coin and get heads ten times in a row. Which best describes your opinion?
- Odds are your next flip will be a head.
- Odds are the next flip will be tail.
- Odds are 50/50 it will be a head or tail.
- It's time to take a close look at the coin and make sure it doesn't have heads on both sides, or is not a normal balanced coin.
The January Effect“Analysis of broad samples of value-weighted and equal-weighted returns of U.S. equities documents that abnormally high rates of return on small-capitalization stocks continue to be observed during the month of January. This January effect in small-cap stock returns is remarkably consistent over time ... After a generation of intensive study, the January effect continues to present a serious challenge to the efficient market hypothesis."Mark Haug and Mark Hirschey in “The January Effect”3
Turn of the Month Effect
The Monday Effect
The question of whether past prices and charts can be used to predict future prices has been subject to extensive research and debate. "Technical Analysis" is a general term for a number of investing techniques that attempt to forecast future securities prices by studying past prices and related statistics. Common techniques include strategies based on relative strength, moving averages, as well as support and resistance. The majority of researchers that have tested technical trading systems (and the weak-form efficient market hypothesis) have found that prices adjust rapidly to stock market information and that technical analysis techniques are not likely to provide any advantage to investors who use them."The central proposition of charting is absolutely false, and investors who follow its precepts will accomplish nothing but increasing substantially the brokerage charges they pay. There has been a remarkable uniformity in the conclusions of studies done on all forms of technical analysis. Not one has consistently outperformed the placebo of a buy-and-hold strategy."
Burton Malkiel has been one of the most public critics of technical analysis and the excerpt above is from his best seller A Random Walk Down Wall Street. I’ve included some other quotes from those that criticize technical analysis at the end of this chapter. However, there have been studies that suggest there may be some validity to some forms of technical analysis...
The only thing we know for certain about technical analysis is that it's possible to make a living publishing a newsletter on the subject.
Martin Fridson, Investment IllusionsTechnical analysts are the witch doctors of our business. By deciphering stock price movement patterns and volume changes, these Merlins believe they can forecast the future.
William Gross, Everything You've Heard About Investing is Wrong!The one principal that applies to nearly all these so-called "technical approaches" is that one should buy because a stock or the market has gone up and one should sell because it has declined. This is the exact opposite of sound business sense everywhere else, and it is most unlikely that it can lead to lasting success in Wall Street. In our own stock-market experience and observation, extending over 50 years, we have not known a single person who has consistently or lastingly made money by thus "following the market." We do not hesitate to declare that this approach is as fallacious as it is popular.
Benjamin Graham, The Intelligent InvestorTechnical analysis is doomed to fail by the statistical fact that stock prices are nearly random; the market's patterns from the past provide no clue about its future. Not surprisingly, studies conducted by academicians at universities like MIT, Chicago, and Stanford dating as far back as the 1960s have found that the technical theories do not beat the market, especially after deducting transaction fees. It is amazing that technical analysis still exists on Wall Street. One cynical view is that technicians generate higher commissions for brokers because they recommend frequent movement in and out of the market.
William Sherden, The Fortune Sellers: The Big Business of Selling and Buying Predictions
Chapter 23 Notes - The Footnotes in the Book are sequential and for this chapter start at #448 and end at #461.
These notes are provided for those that have purchased the book and would like to access the notes and links directly.
1. Robert Haugen and Philippe Jorion, The January Effect: Still There after All These Years Financial Analysts Journal, January-February 1996
2. William Bernstein, The Incredible Shrinking January Effect, http://www.efficientfrontier.com/ef/799/january.htm Robert Haugen and Philippe Jorion, The January Effect: Still There after All These Years Financial Analysts Journal, January-February 1996
3. Mark Haug and Mark Hirschey, “The January Effect,” Financial Analysts Journal September/October 2006
4. Michael Cooper, John McConnell, and Alexei Ovtchinnikov, “What’s the Best Way to Trade Using the January Barometer?” https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1436516 July 20, 2009 (later published in the Journal of Investment Management, 2010)
5. Josef Lakonishok and Seymour Smidt, 1988, Are seasonal anomalies real? A ninety-year perspective Review of Financial Studies 1988 1(4), 403-425
6. Chris R. Hensel and William T. Ziemba, "Investment Results from Exploiting Turn-of-the-Month Effects," Journal of Portfolio Management, Spring 1996
7. John McConnell and Wei Xu, Equity Returns at the Turn of the Month, Financial Analysts Journal, March/April 2008
9. Lawrence Harris, "A Transaction Data Study of Weekly and Intradaily Patterns in Stock Returns," Journal of Financial Economics, June 1986. See also http://calendar-effects.behaviouralfinance.net/weekend-effect/
10. William Brock, Josef Lakonishok, and Blake LeBaron, Simple Technical Trading Rules and the Stochastic Properties of Stock Returns, The Journal of Finance, December 1992
11. Louis K. C. Chan, Narasimhan Jegadeesh, and Josef Lakonishok, Momentum Strategies, The Journal of Finance, December 1996.
13. Rob Arnott, Vitali Kalesnik, Engin Kose, and Lillian Wu “Can Momentum Investing Be Saved?” https://www.researchaffiliates.com/en_us/publications/articles/637-can-momentum-investing-be-saved.html October 2017
14. Julie Segal, The Momentum Factor Is Real. Too Bad It Doesn't Work, November 21, 2018 https://www.institutionalinvestor.com/article/b1bxr4ppygmdth/The-Momentum-Factor-Is-Real-Too-Bad-It-Doesn-t-Work
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