Eclipse 2017: Will the total solar event affect your investment performance?

The financial districts of the world’s major cities are surprisingly superstitious places. But does it ever pay?

It seems skittishness around the moon’s blocking of the sun extends to the stock market
It seems skittishness around the moon’s blocking of the sun extends to the stock market

August is a funny month in the City. It’s pretty damned empty as financial professionals ditch the 5-to-9 workday for some down time.

While they’re away, those investors who haven’t done the same are twiddling their thumbs waiting for signs of life. It’s been a welcome period of relative calm after being battered by a decade of volatility. But this quiet moment could be about to change, experts suggest, leading some to fall upon increasingly bizarre ways to work out what happens next.

“Insights into stock market trends often come from quirky places. With company valuations at unusual highs some are pointing to solar and astral events that are happening in the next month to make worrying predictions,” says Mark Taylor, CEO of Selftrade from Equiniti.

Astro-economics

The movement of the moon in front of the sun is, by all accounts, a remarkably unnerving thing to witness. But it seems a general skittishness on that day regularly extends to the stock market.

“Much is being made in the US of the so-called “Great American Solar Eclipse”, which takes place on August 21st,” Taylor notes. “The Harriman Stock Market Almanac recently reviewed 15 solar eclipses visible from America since 1900, and found that just 13 per cent of the days before an eclipse experienced a positive return, compared with 47 per cent for the day itself and 80 per cent on the day afterwards.

“On the day before and the day of each eclipse the average return of the Dow Jones index was minus 0.3 per cent, and the average on the day after the eclipse was just 0.2 per cent.”

It suggests that superstitions around the eclipse still exist in the cold hard world of analytics, indeed there are even persistent suggestions (as there are in, for example, A&E departments) that a new moon is good while a full moon is bad.

Numerology

It’s less of a leap from trading to numerology, especially if you’re based in the Far East. With the numbers eight and four sounding like the words for ‘prosperity’ and ‘death’ in Chinese, it’s easy to see why traders and investors here steer clear of certain numbers while being drawn to others.

It doesn’t pay though. One study of Taiwanese day traders in 2014 found that individuals were 50 per cent more likely to place an order on trades ending in an eight. Their returns were just under 9 per cent lower over a year than their less superstitious peers’ performance.

Meanwhile, there’s a surprisingly large number of research papers dedicated to the Friday 13th effect here in the UK, which suggests that returns on these days are significantly lower than normal.

For the most part, ridiculously time-consuming studies since the early 1980s analysing data going back to the 1930s in the UK and worldwide, found that if anything the opposite is true unless you force the stats to fit the notion by taking into account the days immediately surrounding a Friday 13th.

The power of the calendar

A trading desk favourite across the pond suggests that Rosh Hashanah, the first day of the Jewish New Year is the time to sell positions before buying them back on the day of atonement, Yom Kippur.

Here, the mantra points to selling in May, going away and only returning on St Ledger’s day, based on the idea that there is significantly stronger average stock market growth between November and April. It works, depending on who you speak to, roughly 40 per cent of the time. (There are, of course, dates when everything really does happen at once, for less than mystical reasons, such as the “triple witching hour”.)

Caution is advised in this, the last hour of the stock market trading session on the third Friday of every March, June, September and December as these days see the expiration of three kinds of securities – stock market index futures, stock market index options and stock options. The alignment increases trading volumes and, often, price volatility for related securities.)

Self-fulfilling prophecy

“Despite the fact that there is often little substantiation of their impact, many people think that superstitions can and do affect the markets,” says Phil Smeaton, CIO, Sanlam.

This, he suggests, is why many give lip service to the idea of, for example, the October Effect (when some of the worst days on the markets have occurred) the Super Bowl Indicator (the belief is that it will be a good year for the US market if a National Football Conference team wins and a bad one if an American Football Conference team is victorious), or the Presidential Election Effect (with the first two years said to bring recession, war and bear markets and the second two years bringing bull markets and gains).

“Interestingly though, any such superstition that manages to gain some credibility can often become a self-fulfilling prophecy,” he adds. “The traditional Santa Claus Rally in the second half of December, for example, usually causes risk assets to rise in price. But if enough investors decide to take on extra risk in November, in anticipation of a Santa Claus Rally, then this could cause a price rise in November instead. It would result in many investors taking more risk than their natural tolerance during December.

“Consequently, even a slight fall in prices might cause these investors to sell these positions during December, because the conviction in their investment premise – that Santa Claus will cause the market to rally – is easily shaken.

“Although superstitions can affect markets, the foundation of any investment strategy should be disciplined, objective analysis.”

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