Profiting from the Anomalies

There are many different factors that affect stock market levels on a minute-to-minute basis. This includes inflation data, gross domestic product (GDP), interest rates, unemployment, supply, demand, political changes, and broader economic forces, among others.

Complicating this are some general market trends, which have been determined historically to exist. Like their share-price-based brothers, these stock market anomalies may provide buying opportunities for investors. These anomalies include:

Price-based regularities:

1. Lower-priced stocks tend to outperform higher-priced stocks, and companies tend to appreciate in value after the announcement of stock split.

2. Smaller companies tend to outperform larger companies, which is a key reason for investing in small cap stocks.

3, Companies tend to reserve their price direction in the short and long-term.

4. Companies that have a depressed stock price tend to suffer from tax-loss selling in December and bounce back in January.

Calendar-based regularities:

These regularities allow you to better time your investments in the short-term. Although investors should remember that over the long term the benefits of a regular investment plan (investing each month) far outweigh the benefits of trying to time your investment by a day or two, the following patterns have been shown to occur.

1. Time-of-the-day effect. The beginning and the end of the stock market day exhibit different return and volatility characteristics.

2. Day-of-the-week effect. The stock markets tend to start the week weak and finish the week strong.

3. Week-of-the-month effect. The stock market tends to earn the majority of its returns in the first two weeks of the month.

4. Month-of-the-year effect. The first month of the year tends to show increased returns over the rest of the year. This is referred to as the January effect.

Investors should remember that not every anomaly comes about every time, but making sure you’re aware of anomalies will allow you to profit over the long-term and deal with market volatility in the short-term. In short, profit from these anomalies, but don’t aim to make use of these anomalies at the expense of your long-term investment objectives.