Trading patterns known but using them is tricky

Andrew Leckey

June 09, 1993|By Andrew Leckey | Andrew Leckey,Tribune Media Services

Buy stock on Mondays, because prices tend to be lower. Sell stock on Fridays, when prices are likely to be higher.

Purchase small-company stocks before January, a month in which they start outperforming the overall stock market. That upward trend generally carries through the first half of the year.

These are the sort of hypotheses that intrigue some investors but make others scoff.

They aren't fools' tales, for even though events can deviate from the norm, trading patterns are undeniable. Institutional traders with enormous, actively traded portfolios are firm believers.

It's just that profiting from this fascinating information is often a difficult task.

"Patterns are harder to disguise these days, because the computer quickly finds them," pointed out John Manley, managing director and quantitative analyst with Smith Barney, Harris Upham & Co. "But when you see a pattern, you really only have half the equation, because you must know why the pattern occurs to decide whether you and your portfolio can take advantage of it."

A new report from the Institute for Econometric Research in Fort Lauderdale, Fla., has examined 65 years of trading and come up with strong examples of seasonal patterns:

* There are above-average stock-market returns on the last trading day and first four trading sessions of every month.

* Superior performance occurs on the two trading sessions preceding each market holiday closing. Typical examples would be the two trading days before market closings for New Year's Day, Presidents' Day or Labor Day.

* Stock-market performance is strongest on the last trading day of the week, usually a Friday, and weakest on the first trading session of the week, which generally is a Monday.

* Inferior market performance is to be expected on the trading day (usually the Monday following the third Friday of each month) after the day stock and index options expire.

An investor can benefit from seasonal patterns, the institute contends, by executing planned stock purchases near the beginning of the seasonal periods and deferring planned sales to the end of the periods.

"We use seasonality as part of our market-timing strategy for 16 different portfolios, though we realize that, as more people find out about seasonality, the system becomes less effective because people buy and sell sooner," observed George Shirk, research analyst with the institute. "For example, the so-called January effect involving small-company stocks keeps getting pushed forward as investors anticipate that effect."

It is one trend most experts agree on.

"While individuals should generally invest long term and not pay attention to seasonality, the January effect makes it a good idea to buy small-company stocks late in the year, before prices rise," advised Richard Bernstein, quantitative analyst with Merrill Lynch & Co.

However, you can't simply focus on that effect and forget everything else.

"Our favorite sector right now is small-cap value stocks," said Bernstein. "Although we know these typically don't do as well in the second half of the year, we still feel strongly enough about them to keep them our favorite, despite the considerations of seasonality."

Buy-and-hold remains the best strategy for the individual. But if you can gain a small edge here or there as you build and adjust a portfolio, so much the better.

"The best months to own stocks are December and January, since mutual funds are funded then and because people are looking at optimistic corporate earnings estimates for the coming year," said Manley.

"On the other hand, the concept of the summer rally is a myth that doesn't hold up when viewed historically, and I'd personally much rather buy stocks on Nov. 30 than in June."

Manley's greatest concern is what he calls the presidential election cycle, which indicates the second year of a Democratic president's term (versus the first year of a Republican's term) is usually bad for the stock market.

You can obtain a free copy of the eight-page Seasonality System report by writing to the Institute for Econometric Research, 3471 N. Federal Highway, Fort Lauderdale, Fla. 33306. That organization publishes 11 subscription investment letters, including the popular Mutual Fund Forecaster.

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