Types of Stock Market Anomalies

The stock market sometimes deviates from its usual behavior. This is called an anomaly. Some anomalies come and go quickly, and others happen just frequently enough to frustrate the rational investor. Some of the most common anomalies present intriguing trading opportunities and others simply make for interesting speculation as to their causes. Since anomalies are by their nature quirky, any investor who counts on an anomaly can be in for a rude awakening.

The January Effect

This anomaly is perhaps the most rational. Stocks that did poorly in the fourth quarter of the previous year tend to outperform the market in January. One reason this may happen is investors tend to sell their losers just before the end of the year so they can write the loss off their taxes. Buyers who don't want to get caught up in tax selling wait until January to buy the stocks. This drives the price back up. This explanation would be very reliable if fourth-quarter losers always outperformed in January, but this doesn't happen often enough to make buying December's losers in January a profitable strategy.

Days of the Week

Stocks tend to have positive results on Fridays rather than Mondays. Statistically, this anomaly is true, but it is not true enough to be predictable every week. An investor who buys a stock on Friday because it is supposedly an "up" day can lose a lot of money if the stock goes down. Similarly, avoiding stocks on Mondays because they supposedly aren't as good as Fridays may mean missing out on a day of rising prices.

Reversals

Stocks that tend to do very well will reverse and under-perform the market for as much a year. By the same token, stocks that were under-performing sometimes begin outperforming for an extended period of time. This occurs whether or not company financial statements justify the price movements. This may be due to investor psychology. They expect high-fliers to come back down and "neglected" stocks to get discovered and rise. The expectation may actually cause the change in prices.

The Santa Claus Rally

Since 1950, the 12 days starting on Dec. 25 have produced superior stock market results, when compared to any other 12-day period in the market. The difference is almost five times better. If this happened every year like clockwork, all investors would have to do is save up their money until Christmas and jump in the market. However, investors do not always get a Christmas present from the market, and many end up with a lump of coal in their stockings for trying to trade an anomaly.

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About the Author

Kevin Johnston writes for Ameriprise Financial, the Rutgers University MBA Program and Evan Carmichael. He has written about business, marketing, finance, sales and investing for publications such as "The New York Daily News," "Business Age" and "Nation's Business." He is an instructional designer with credits for companies such as ADP, Standard and Poor's and Bank of America.

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