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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

0.00%

1.00%

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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.