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The calendar effect refers to perceived indicators or trends that are based on some aspect of the calendar. Related to stock performance as well as general market performance, the basic idea behind a calendar effect is that there are certain times of the year when specific conditions can be depended on to develop. These steady trends are understood to be consistent and can be predicted with a high degree of accuracy.
There are a few rather well known examples of the calendar effect that many investors believe to be highly predictable. Perhaps the most popular of all calendar effect strategies is called the January effect. Essentially, this calendar effect indicates that small-cap stocks will begin to rise on the last day of December and will continue to do so through the fifth trading day in January.
Much of the merit to this calendar effect owes to the fact that there is typically a great deal of selling taking place at this time, as one final means of wrapping up the finances for the previous calendar year. The last round of selling helps to create tax losses that can be called upon when doing fourth quarter tax reports, helps investors to raise quick holiday and post holiday cash, and creates capital gains. Persons who are looking to snap up good deals join in the selling frenzy by purchasing the stocks during this small window of opportunity.
The Mark Twain effect is also another calendar effect that some investors swear by. Based loosely on a quote by author Mark Twain, the theory behind this calendar effect is that stock returns are lower during the month of October than any other thirty day period in the calendar year. While the historical support for this theory is somewhat spotty, supporters are quick to point out that the stock crashes of both 1929 and 1987 both occurred in the month of October.
A third example of the calendar effect is known as the Halloween indicator. This concept basically states that the stock market is significantly stronger from November to the following April. Following this perceived effect, investors will sell in May and then let their holdings ride until the following October, usually the end of the month. This particular calendar effect actually seems to have a fair amount of historical detail to support the theory. Many supporters of the Halloween indicator suggest that people taking vacations and holidays during the summer months can lead to market weakness.
Do they teach things like this in stock trading school? Because that seems like something I could get a hold of. If all it takes is being able to look at a calendar then I'd be golden!
Of course, I know it's more complicated than that -- but I do wonder how many big stock traders set store by the whole calendar effect thing. That would be an interesting survey -- I bet more stock firms believe in it than you'd think. Kind of makes me want to check in on my broker!
And @rallenwriter -- Totally agree on the Office Calendar Effect. I would add that there should be a "Make Your Own Photo Calendar" effect as well, for when the elderly in your life get ahold of that free calendar creator software and start making 30 calendars for the same year just to get all their pictures on it!
This whole calendar effect thing is really interesting, but I could see it being a kind of chicken and egg phenomenon.
For example, people hear about the Halloween calendar effect and start selling stock like crazy in October because that's what everybody else is doing.
Or they catch the January effect simply because so many people are looking for it, and end up falling in with the effect just because they've heard about it.
I know that this may not be true of all the big investment firms (or it may, what do I know?), but I could really see smaller investors getting sucked into something like that, and then claiming that it was just natural that
the market would act that way because of the calendar effect.
Do you know when the whole idea of the calendar effect was first published? I would be really interested to see how the whole idea got started.
I would also add my own addendum: the nauseous feeling when you see all the cutesy, comic sans customized calendars when one of your colleagues goes nuts with the free calendar maker software should be known as the "Office Calendar Effect."
How interesting! I had no idea that there even was such a thing as the calendar effect; I just thought the link was going to talk about the effect of print out calendars, or how to customize a calendar to get the best effect.
Very informative, and much, much more interesting than "make your own" calendars. I wonder who first came up with that whole concept?
Anyway, great article -- keep up the good work, wisegeek!