Trading Patterns Links

Ticker Sense looks at election day and the markets:

…in the thirteen instances where the same party did not control both houses of Congress and the Presidency, the market has risen in all but two periods for an average gain of 23%, while in the ten periods where the same party controlled all three branches, the market has risen in seven periods for an average gain of only 11.3%.

but Mark Hulbert points out that another study disagrees.

Brett Steenbarger looks at whether you should buy when lots of stocks are high:

What we find is that, 40 days after we get a large number of new highs, the S&P 500 Index ($SPX) is up on average by only .32% (68 up, 68 down). That is a subnormal return when compared to the average 40-day return of 1.47% (2695 up, 1501 down) over that period.

When only .5% or fewer of stocks are making new highs (N = 202), the next 40 days in $SPX average a sizable gain of 4.34% (164 up, 38 down), much better than average.

In a related post, he looks at the tendency for mean reversion via another measure:

When the 60-day high occurs with a relatively strong market participation of over 180 new highs (N = 238), the next sixty days in $SPX average a gain of 3.26% (187 up, 48 down)—a nice outperformance. When the 60-day high occurs with a relatively weak participation of under 180 new highs (N = 237), the next sixty days in $SPX average a gain of only 1.26% (138 up, 99 down)—a notable underperformance.

As a follow-up to that post, he looks at the data differently.

CXO Advisory reviews a paper that examines whether “an opening stock price above or below the prior session close indicate price movement for the rest of the trading day.” The paper finds a significant negative correlation (prices reverse the overnight moves), and as usual, the effect is larger for small caps, but questions whether anyone but market makers can exploit it.

They also examine a paper that looks at the “Fed Model” as a predictor over the period 1954-2003:

The yield gap correlates positively with future stock returns at both short (less than one year) and long forecasting horizons. Forecasting power for stock returns is greater at short horizons than at long horizons. At short (long) horizons, forecasting power is greater when the yield gap is negative (positive). Forecasting power for stock returns is greater in recessions than in expansions…

In summary, the Fed Model can help generate economically significant abnormal stock returns, most reliably within one year when predicting a bad market.

The Washington Post looks at stock performance in the fourth quarter:

If we take a simple average of the quarterly percent changes posted by the index from 1996 through 2005, the fourth quarter towers over the other three. By my quick calculation, the fourth quarter averaged a 7.8 percent gain, compared with a 3.7 percent advance in the second quarter, a 1 percent rise in the first quarter and a 3.9 percent loss in the third quarter.

Infectious Greed looks at profiting from analyst “dustups.” He reviews a paper that confirms that stocks with wide-ranging earnings estimates tend to be overvalued.

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