PRICEPATTERNS,CHARTSANDTECHNICALANALYSIS:TEMPORALPATTERNS

AswathDamodaran

2

SeasonalandTemporalEffectsonPrices

• Empiricalstudiesindicateavarietyofseasonalandtemporalirregularitiesinstockprices.Amongthemare:– TheJanuaryEffect:Stocks,onaverage,tendtodomuchbetterinJanuarythaninanyothermonthoftheyear.

– TheWeekendEffect:Stocks,onaverage,seemtodomuchworseonMondaysthanonanyotherdayoftheweek.

– TheMid-daySwoon:Stocks,onaverage,tendtodomuchworseinthemiddleofthetradingdaythanatthebeginningandendoftheday.

• Whiletheseempiricalirregularitiesprovideforinterestingconversation,itisnotclearthatanyofthemcanbeexploitedtoearnexcessreturns.

3

A.TheJanuaryEffect

¨ StudiesonreturnsonstocksindicatethatreturnsinJanuaryarehigherthanreturnsinanyothermonthoftheyear,byawidemagnitude.

¨ Specifically,acrossallUSstocks,theaveragemonthlyreturninJanuaryhasbeen3.26%,between1926and2018,whereastheaveragemonthlyreturnforFebruary-Decemberhasbeen0.95%.

¨ Moregenerally,thereseemstobeevidence(albeitweaker)thatthestrongerthereturnsinJanuary,thebetterthereturnswillbefortheyear.

4

TheJanuaryeffectisstrongestforsmallcapstocks

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%

8.00%

January February-December

AverageMonthlyReturns:USStocksfrom1926-2018

SmallestCapDecile

Market

LargestCapDecile

5

Anditisstrongacrossinternationalmarkets

!

6

Potentialexplanations

¨ TherearethreepossibleexplanationsfortheJanuaryeffect:¤ Fundflows:Itispossiblethatinvestorswithdrawcashcollectivelyfrom

stocksinDecemberandinvestmoneybackintostocksinJanuary.¤ Windowdressingbyinstitutions:Institutionsmayselllosingstocksin

DecemberandbuythembackinJanuary.¤ Taxselling:InvestorsmaysellinDecemberfortaxreasonsandbuy

backinJanuary.¨ ThefactthattheJanuaryeffectisstrongestforsmallcap

stocksindicatesthatwhateverthereasonforithastobestrongerforsmallercompanies(whichtendalsotohavelessfollowedbyanalystsandthereforehavemoreinformationcomingfromthecompanies).

7

B.TheWeekendEffect

8

TheWeekendEffectinInternationalMarkets

9

Hasitheldup?

!

10

TheWeekendEffect:Explanations

¨ TheMondayeffectisreallyaweekendeffectsincethebulkofthenegativereturnsismanifestedintheFridayclosetoMondayopenreturns.ThereturnsfromintradayreturnsonMondayarenottheculpritsincreatingthenegativereturns.¤ Mondayeffectisworseforsmallstocksthanforlargerstocks.¤ Mondayeffectisnoworsefollowingthree-dayweekendsthantwo-day

weekends.¨ Therearesomewhohavearguedthattheweekendeffectisthe

resultofbadnewsbeingrevealedafterthecloseoftradingonFridayandduringtheweekend.

¨ Thereisevidencethattheweekendeffectgetsweakerforstockswhereshortsellingand/orputoptionsisavailable,allowingtraderstotradeaheadoftheMondayopen.

11

C.IntradayPriceeffects

¨ Asresearchersgetaccesstointradayprices,theyarefindingpatternsinstockpricesduringthecourseoftheday,withsomeclaimingtofindevidenceofamid-daymarketswoonandothersfindingevidenceofpricepatternsatthestartandendoftradingdays.

¨ Thesepatterns,eveniftheyexist,aredifficulttoexploitforstand-aloneprofitsbutmayallowinvestorstoaugmentprofitsfromothertradingstrategies.

12

TemporalEvidenceandInvesting

¨ Therearetimepatternsinstockprices:Whilemuchtimeandefforthasbeenspentchroniclingthepresenceoftemporaleffectsonstockprices,thebottomlineisthatthereislittleevidencethatinvestorshavebeenabletoexploittheseeffectstomakemoney.

¨ Butmakingmoneyonthesepatternsseemstobedifficult:Infact,attemptstoexploitthefactorsseemstoreducetheirpotency,suggestingthattemporaleffectshavelesstodowithmarketefficiencyandmoretodowithmarketmicrostructureandinformationpatterns.