market moves: not what you learned in b-school

Market moves: Not what you

learned in B-School

Worried about your stocks portfolio? Amid today’s wild market gyrations, it can be hard to get a grip

on what, exactly, causes moves in share prices. Here are some price-movers that are decoupled

from the economy, but still have an impact.

Revolutions, recessions, natural disasters: they all

have an impact on share prices. Corporate profits

and losses, obviously, as well. But what about more

obscure factors, like whose byline appears on a

widely read financial column, or the outcome of a

soccer match, or where Saturn’s orbit around the

sun takes it in relation to Uranus and Pluto?

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Skeptics may scoff, but such questions are a subject

for serious academic study and are not without some

empirical support. “Price formation is based not just

on evidence and analysis but also on the psychology

of hopes and fears,” says Joel Peress, Associate

Professor of Finance at INSEAD, who confesses to a

fascination with the ways in which prices are

formed. “When you value an asset, you don’t just

care about cash flows. You also care about what the

market thinks. What you are willing to pay today will

depend on what you think the market will think

tomorrow.”

Is a journalist known for an upbeat writing style due

to publish a market-watch column? In a 2011 paper

entitled “Journalists and the Stock Market”, four

researchers at the University of North Carolina

claimed to have identified correlations, positive and

negative, between who signed the Wall Street

Journal’s Abreast of the Market column over a

37-year time span and same-day and next-day

market performance. Knowing whose byline to look

for, they asserted, can help in predicting market

returns.

Non Sequiturs

Is a big soccer match in the offing? Then brace

yourself for share price falls. According to the

authors of a 2007 article in the Journal of Finance

entitled “Sports Sentiment and Stock Returns”,

defeat for a national team can prompt stock market

losses unrelated to objective factors in a nation’s

economy. By contrast, they identified no parallel

market gains in winning countries. Thus, a money-

making strategy could be to short futures on both

competing countries’ stock market indices before an

important match, to exploit the asymmetry of the

outcome’s impact.

What about the weather? A sunny day on Wall Street

is known to encourage increased trading volume,

according to Peress. But that’s not all. In “Good Day

Sunshine: Stock Returns and the Weather”, a 2003

article in the Journal of Finance, researchers from

two US institutions claimed that share price

movements between 1982 and 1997 in the main

stock markets of 26 countries revealed links

between morning sunshine and higher average

daily market index returns that they described as

“difficult to reconcile with fully rational price

setting”.

And then there’s the moon. In a 2006 article in the

Journal of Empirical Finance entitled “Are investors

moonstruck? Lunar phases and stock returns”, three

University of Michigan researchers claimed to have

found a “significant cyclical lunar pattern in stock

returns” using data from 48 developed and

emerging country markets. Around the time of the

full moon, they reported, stock returns tended to be

lower than around the time of the new moon.

The calendar effect

So why did the Dow Jones Industrial Average index

commence a straight week of gains on September

12 2011, the day of the September full moon,

bucking both the moon and the well-known

“Monday effect”? Could it be that the market had

been oversold during the previous few weeks of

turmoil. Or were some investors trying to make a

quick buck by buying stocks on Monday in the

expectation of being able to sell them at a profit

later in the week?

Since the early 1980s, according to Peress, financial

analysts have been aware of a tendency for market

returns to weaken at the start of a week. That’s just

one of many “calendar effects” that portfolio

managers routinely take into account when planning

investment strategies. Interestingly, however, says

Peress, “the Monday effect has shrunk a lot since it

was first documented in the finance literature. This

suggests that smart professional investors who

learned about the anomaly traded on it, thereby

reducing or even eliminating it.”

Gloom and doom

Whatever the case, for those who follow the planets,

August’s savage stock market sell-off came as no

surprise. For years, financial astrologers had been

forecasting pandemonium around this time. The

cause? A “Saturn-Uranus-Pluto T-square”, in which

Saturn and Uranus have moved to positions

diametrically opposite each other in the heavens,

with Pluto perpendicular to their axis.

The conjunction of these three celestial bodies, if

astrologers are to be believed, has already

prompted uprisings in North Africa, an earthquake

and tsunami in Japan and riots in the United

Kingdom. And the buzz in the star-gazing

community is that things will get worse before they

get better. Over the next few years, according to

astrological websites, the world faces breakdowns

in social order, uprisings against authorities, stock

market slumps and the destruction and rebuilding of

economic and social structures.

Where does this leave the investor? For a start, says

Peress, forget the classic presumption that all

available information is immediately reflected in

market prices. “There are powerful forces towards

efficiency, essentially stemming from investors’

profit-maximising behaviour, but markets are not

perfectly efficient. Anomalous patterns persist, often

affecting smaller and less liquid stocks where such

patterns tend to be more costly to correct.”



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Looking ahead, investors may wish to bear in mind

this thought from American astrologer Bill Herbst.

“At this point,” he told readers in a recent post on

his website, “uncertainty is the order of the day. All

we can be sure of is that life will change in the

decade ahead.” The last time the world saw a

similar Saturn-Uranus-Pluto configuration, he noted,

was in the early 1930s at the time of the Great

Depression. We know what happened next.

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