Stock market investors hoping that adages and simplistic trading patterns offer a chance to make easy profits may have to dig a little deeper — and act faster — in an age of increasingly efficient markets.
Analysts say that many trends like "Sell in May and Go Away" work only half the time, but this does not stop them looking for new patterns: being the first to spot a trend should still pay dividends.
The S&P 500 has fallen 43 percent to date since the start of 2008, yet a Goldman Sachs study recently showed that in this period the cumulative gain from holding the S&P between 2 p.m. and 4 p.m. has been 35 percent.
In contrast, the cumulative loss from holding the S&P between 9.30 a.m. and 2 p.m. is 54 percent.
So, it's quite simple. Just buy at 2 p.m. and sell at 4 p.m. And even better if you could short the index at 9.30 a.m., and buy it back at 2 p.m.
But the efficient markets hypothesis says that while trends like this exist the problem is that as soon as people find out about them, they disappear.
Prices would rise in anticipation of investors buying shares, and fall ahead of 4 p.m. in expectation of their exit.
"If the trend was really as strong as Goldman Sachs says it is, I don't understand why they told anybody," says UK-based stock market historian David Schwartz.
"I have trends I trade all the time. And I write columns, I don't tell anybody about the really good stuff that works for me," he said.
MAY OR MAY NOT WORK
UK investors are familiar with the mantra "Sell in May and Go Away — Come Back on Leger Day", which suggests they should dump stock and stay out of markets from May to just before the St Leger horserace in September, when prices purportedly rise.
Analysts say "Sell in May" only works half the time — meaning investors are no more likely to be better off as a result of following it than they would be than buying and selling in any other four-month period of the year.
Data shows that only twice in the last decade has the index fallen between mid-May and mid-September in the same year as it rose for the year as a whole.
Even though the index has fared disproportionately badly in seven out of 10 years in the May-September period, it is not enough to convince analysts that such adages work.
"If they worked, you wouldn't need fund managers," said Frances Hudson, Global Thematic Strategist at Standard Life Investments.
"There were good reasons it worked in the UK for a while, when the brokers abandoned their desks and went off to Ascot."
Adages have also stopped working because the fundamental nature of trading has changed in the past two years with banks going under amid unprecedented market turmoil.
"'Never short on the fourth day' was an old Wall Street adage, suggesting that if markets fall for 3 days in a row there is an above average probability it will rise on the fourth day," said Philippe Gijsels, strategist at Fortis in Brussels.
"But quite a few of these rules that worked for many years no longer apply — we now see declines of 11 days in a row, because the nature of the market has changed. Players who acted as natural buyers when markets fell are no longer there."
TREND IS A FRIEND, BUT SPOT IT EARLY
But most strategists say such trends play little part in their thinking, and many are unaware of their existence.
"A trend is a trend until it stops. If you're lucky enough to be the one to identify a trend, you have first mover advantage. We don't tend to set too much store by them," said Jeremy Batstone-Carr, strategist at Charles Stanley.
Schwartz said another possible flaw in the Goldman argument was that trading costs on frequent transactions may be too high relative to the gains to enable investors to make a profit.
But at a time when analysts and rating agencies have consistently got it wrong, few are in a position to scorn easy-to-remember rules of thumb, and economists tell this joke to illustrate the limitations of the efficient market idea:
Two economists are strolling down the street when they come upon a $100 bill lying on the ground. But they don't reach down to pick it up. They look at each other and say: "No, if it were a real $100 bill, someone else would already have picked it up."
Schwartz says some trends really have worked consistently. In the 30 years to 2007, he says, Buying on Nov. 1 and selling on April 30 has worked in all but four years.
He also insists the "Christmas rally" is no myth. About 90 percent of the time, UK shares have risen over this period, which runs from the middle to the end of December.
The FTSE 100 gained 3.7 percent during this period in 2008, despite having fallen more than 31 percent overall for the whole year.
The Dow average has risen an average 0.7 percent during the Christmas holiday season, compared with a 0.1 percent advance for all four-day periods, data since 1900 from Bespoke Investment Group LLC, based in Harrison, New York show.
