The following is excerpted from our "Market Trends Diary" in November and late October 2003.  The idea is to give potential subscribers some sense of the style of our market coverage.  Of late, we've gotten in the habit of updating on a daily basis, though we reserve the right to post on a less frequent basis.  "Distillations" of some of the subjects we've covered are included in the table above.  Non-subscribers can view the "seasonal charts" page...the other links are password-protected.

Nov 28...the last trading day of the month.  We saw several interesting effects today.  Stocks trading well over their resistance levels gained well above the average stock, with very strong significance.  Yearlong gainers also fared well.  Historically, these groups fare well in December.  Volatile stocks in general fared well, despite the fact that the general market was rather dull today.

On the negative side, regional banks were weak.  Interestingly, stocks with a high number of different institutional holders were also weak on this final trading day of the month.

Nov 26...a thoroughly tedious pre-holiday market.  The only trend even worth mentioning would be that of yearlong losers continuing to lose.

Nov 25...looks like a good day for the technical guys...stocks that traded well over their resistance levels gained in a very significant way.  Historically, these groups fare well in December, so maybe we're seeing some early activity in the group.  Other gainers included volatile stocks in general, and those with large book values relative to stock price.  Specific industry groups were not in focus today.

On the negative side, nothing of significance emerges.  Large-caps were weak.

Nov 24...The best place to be in this very positive market was volatile stocks.  The worst...non-volatile stocks.  We take this as an indication, based on historical analysis, that tomorrow will probably be a positive market again.  Other very positive places to be were biotechs, semiconductors, and, interestingly, stocks that performed well 252 days ago.  That last group came in with good statistical significance, meaning it's probably no fluke.

Oil stocks performed poorly.

*******************

We're beginning to wonder if there's any serious correlation between the expectation of macroeconomic announcements, triple witching hour (etc.) and market volatility.  The standard wisdom says there is, yet we've seen any number of volatile, strongly up, or strongly down markets of late with no underlying news, and tedious markets with news.  Today was without any major news, yet we saw a good spread between best and worst performing groups (3.5%) and a very positive day in general.

Nov 21...again, very little distance between the best and worst performing groups in our tables.  So much for the "political considerations" theory below (Nov 20).  In fact, there was news on the macroeconomic front, with the Fed making statements regarding future interest rates.  What's more, today was "triple witching day", a time that is supposedly much more volatile than usual.

The strongest trend was a tendency for stocks that opened on the 20th at levels well below the close on the 19th to perform well...whatever caused these stocks to lose ground in the afterhours on the 19th was the impetus for gains today.

Bottom fishing was also featured today, with stocks that had lost over the last month performing well today.

Nov 20...very little "separation" between the best and worst performing groups in our tables (about a 2% difference between the two).  Perhaps this is the case because the market was driven by political considerations (the bombings in Turkey), rather than the sorts of economic data that would favor certain groups over others.

The most significant observation from our tables is simply that stocks of high volatility lost the most ground today.

Nov 19...yesterday's minor trend toward gains in small caps and losses in large caps came into greater focus today.  Our data shows that there's a good chance this behavior will repeat tomorrow.  Recent losers performed well.

Nov 18...though the market was down again, we broke out of the "textbook" negativity...the biggest losers were not the most volatile issues.  Rather, they were stocks that got burned last Friday, software stocks, and big-caps.  On the positive side, mining stocks did well, as well as those held by a large number of institutions.  There seemed to be a slight theme of favoring issues with good fundamentals.

Given the nature of today's market, we'd say there's a better than average chance that tomorrow will break out of the negativity.

Nov 17...more textbook negative market conditions.  Historically, we've found that days like this, where the most positive stocks are non-volatile and the most negative are volatile, are usually followed by more negativity.  So, longs must hold out for a market that is something of an exception.

Stocks with large gains over the last 3 months were creamed today, losing 3% of their value versus a 1.2% loss for the general market.  Friday's big losers continued to lose.  Nothing of major significance was found on the positive side...financial stocks did OK, as well as stocks with large dividends in general.

Nov 14...a textbook negative market...volatile stocks lost big money, non-volatile stocks resisted losses.  Oils actually gained close to 1%, while REIT's stayed above the water.  Computer stocks of every variety got burned.  Though neither group made our tables, it should be noted that yearlong gainers got burned while yearlong losers resisted losses fairly well.

*******************

Well, we've crunched the data for the first two weeks of the month.  The strategy of choosing stocks with a high high-close differential at the end of October resulted in gains around 4%.  Going with the group with the largest 4% of losses over the last three months resulted in gains of better than 5%...this particular strategy has worked quite nicely on a historical basis as well.

Yearlong gainers got hurt.  The group had some good days during the period, concealing the fact that over the two week haul the group lost a significant amount of ground in comparison to the average stock.  Yearlong losers basically paralleled the market...interesting when you look at the nice gains available by going with 3 month losers, a group that one would expect to overlap a good deal with 1 year losers.

Retails were generally weak.  Semiconductors, a group which has historically performed well in the period, basically paralleled the market, though the ride has been a bit bumpy in the last two weeks.

Looking at risk-adjusted data, REIT's performed better than would ordinarily be expected at this time of year.  Dividend-paying stocks in general did well.  Stocks of low-volatility also gained to a degree greater than what would ordinarily be expected.

Looking to the future, we'd expect yearlong losers to prosper in the next couple of weeks, alongside cheap stocks in general.  Big cap stocks that have performed poorly of late should be avoided.

Nov 13...a good day for bottom-fishing.  Stocks with recent losses gained upwards of 2% today despite an essentially flat general market.  Oils did well.  On the negative side, nothing of great significance emerged, though it's interesting to note that yearlong gainers dropped.  The group has really been topsy-turvy over the last 6 weeks or so.

We've noted that, in general, a good time to go bottom fishing is the day after a strongly positive market (like yesterday's).  It definitely worked today.

Nov 12...an archetypal up market...volatile stocks prospered, non-volatile stocks lagged.  With over 1000 groups examined, the worst-performing group (utilities) was still up about .5%, giving an indication of the broadness of today's advance.  As with yesterday, the market rewarded stocks that have performed well over the last few months (the highest decile of yearlong gainers was up better than 3%).  Semiconductors were up as much as 4%.

It might be worth remembering that one pre-market forecast predicted a "range-bound" market, given a lack of important macroeconomic data to be released.  Wrong!  Hindsight is 20-20, of course, but we believe that a lot of these pre-market predictions are essentially worthless if you "backtest" them.

Nov 11...yearlong winners and volatile stocks continued to lose today.  Some retail groups did nicely in comparison to the market in general.

******************

Here's a link to an article on the "newly discovered" tendency of yearlong winners to continue to gain in December.  I don't quite follow some of the logic regarding the January effect...the idea is that the January effect is "true", but casual investors can't capture it because they would need to buy a huge basket of stocks to realize gains.  To me, the large basket merely means you're less likely to get unlucky (or, for that matter, very lucky) and buy January effect candidates that turn out to be duds (or, January effect candidates that greatly exceed your expectations).  The large basket means you "hone in" on the "true" extent of the January effect, but the large basket shouldn't gain more or less than the average small basket, at least as far as I'm concerned.

Nov 10...a textbook negative market...volatile stocks got burned, non-volatile stocks resisted losses.  Utilities held up well.  Long term winners (those that have gained nicely over 3 months or more) got burned.  Stocks with low profit margins got hurt...a possible reversal of last week's tendency for "junky" stocks to prosper.

Nov 7th...continued upward action in the "junky" stock department, with fundamentally sound low PE ratio stocks getting burned.  A rather murky, directionless day in general, though.

Nov 6th...it looks like some trends reversed today.  We had three month gainers in the loss column, biotechs as winners, and some hints of bottom-fishing.  Our fundamental indicators seem to show a tendency toward buying "junky" stocks...those with negative PE's and low profit margins.

Historically, it's a good time for bottom-fishing...this could be the beginning of a strong period for the group.

Nov 5th...conditions were similar to yesterday's...a mediocre market in general, rewarding volatile stocks most.  Still seeing gains in stocks with long term gains.

Nov 4th...despite the negative tone in the market, you would have done best sticking with volatile stocks.  Tech stocks, therefore, fared well...one market report I saw had them underperforming...that's not what I see.

Nov 3rd..."momentum" is the word for the day.  Semiconductors scored big, biotechs were weak.  Stocks that gained over the last month continued to gain.

Oct 31st...Yearlong gainers got hurt in a significant way today, the last day of the month.  On the long side, nothing of note to report.

**********************

It's the end of the month, so we've got a lot of data to crunch.  In brief, here's the verdict: the general market was up about 7%.  The best place to be this October was semiconductors.  You'd walk away with about an 18% gain that way.  Stocks that got burned on the last day of September were also strong (12%).  Yearlong gainers were strong (10%)...this is rather odd behavior given past October history (the group tends to lose), though perhaps it's not so odd when you consider the fact that we're in an unusual market...one that has racked up overall losses over the last several years, with a new set of tax selling ramifications.  If that sounds fuzzy, it's because we're not pretending to understand what went on with great clarity.  Any thoughts?

Yearlong losers pretty much paralleled the performance of the general market.

On a risk-adjusted basis, banking stocks performed well, particularly in the second half of the month.

On the losing side, stocks with large dividends were the most significant losers.  That's right...we just started incorporating some fundamental data into our analysis.  For the time being, though, we don't have historical fundamental data, so we can't ascertain whether avoiding dividend paying stocks is a good strategy for October in general.  

As expected, REIT's were lousy performers.  There's a good deal of overlap between REIT's and dividend-paying stocks.  This is a subject to investigate further...if you exclude REIT's with low dividends, how would the data look?  (Note 4/04:  we later did a study on this issue...click here).

Other mediocre groups were biotechs, oils, and utilities.  The latter two groups, of course, are also associated with dividends.  

On the whole, you'd probably have to agree that stocks did a pretty nice job of performing in line with historical seasonal trends.  Check out the seasonal data for yourself...this October's performance is tabulated at the top of the page, while the most general historical results are at the bottom.

It will be interesting to see how biotechs perform in November.  We've noted a give/take relationship between semiconductors and biotechs in the past.  

Oct 30th...Though they didn't make our tables, the highest 10% of yearlong gainers underperformed (-.4%) today.  We point this out simply because we've been focusing on this group a lot in recent days.  On the whole, though, the day was bland...no groups stood out from the pack in terms of big gains or losses.

Oct 29th...Yearlong gainers were strong yet again.  This has really been the group to watch this month, not any particular industry.  The group performed well earlier this month, got burned last week, and has looked great this week.  We're guessing on another reversal next week...a mini January effect at the beginning of November.  

Oct 28th...Again, yearlong gainers were strong, with three month and one month winners just behind.  Nice gains in the semiconductors (as much as 6%) as well.  Yearlong losers performed in line with the market.  No big surprises in the losing columns, except that on such a positive day, REIT's still would have lost you money.  This is in line with the expected seasonal weakness of the group.

********************

We've been toying with some of our daily data.  The question we're asking is, "if group X is today's strongest group, what group is likely to be tomorrow's strongest group?"  After crunching the data, we came up with some interesting results.

We've never been fans of naive "momentum" strategies.  The data just doesn't show that simply buying stocks that are going up tends to produce benefits.  What we're finding though, is buying the right group that is going up could definitely be of benefit.  If cheaply-priced stocks prospered yesterday, they're likely to do so again today.  If stocks with low standard deviation prospered, they're likely to do so again.

If you're an experienced momentum guy and are reading this, you're probably saying "duh", but it's nice to see this sort of thing validated by the data.

We'll be publishing some of the results in a few days.  Thinking ahead, I have a feeling that while the strategy of simply repeating the purchase of today's best group probably  produces profits above the general market, it can reverse in a hurry.  This is where stop-losses might come in (another popular strategy that, taken in its naive form, we don't see much purpose to).

Oct 27th...The behavior of yearlong gainers reversed again today...they performed quite well.  Yearlong losers and large caps performed poorly.

Oct 25th...Below (the 22nd), I wrote about how seasonality and charting could relate.  Again, I'm not much of a technical guy.  On the other hand, to the extent that tax-loss selling and window-dressing influence the markets, the charts should be quite revealing on the amount of tax loss selling one might expect, and whether these losses are short term or long term or both.

That gets one wondering if a historical chart might resemble the current one.  The two charts would have to be several years long...short enough so that the spikes aren't blurred out, but long enough to capture long term gains and losses that could be relevant to taxation.

You can view a chart of the Dow that goes back to 1930 at Yahoo.  Problem is, a big gain in the 1930's might be 2 or 3 points in a day.  Nowadays, the Dow can move 300 or more points in a day, so peaks and dips that were actually quite significant 20 years ago get blurred out.  So we charted the Dow in three year periods from 1970 to the current date on the following page.  In the long term, if not the short term, the Dow actually does a decent job of paralleling all the other important indices.  The advantage of using Dow data is simply that there's a lot of it.

If you're looking to find a mirror resemblance to the current market, you might look at 1973-1975.  It's a bit of a stretch, and we won't claim there are any special odds that 2004 will resemble 1976.

Looking at all the charts, one is struck by the dearth of losing three year periods since 1970.  There are only a few.  We're in one now.

I threw in some historical notes as well.  Sometimes sophisticated market analysis blurs the simple fact that the 80's and 90's were relatively optimistic times (freeing of Iran hostages on the first day of Reagan's presidency, end of communism and fear of nuclear war), while the 70's (Vietnam, Watergate, the Cold War, OPEC, the Iranian hostage crisis) and current times (terrorism, North Korea, the Iraq situation) feel a bit gloomy.  Thus the markets.

Oct 24,2003...Again, yearlong winners took a beating without losing groups showing a tendency to move outside the general market.  Looking at the data, a sub-theme of large-caps performing well may be developing.  Others have noted a slight seasonal tendency for large-caps to outperform around this time of year, and this trend does seem to be manifesting.

*****************

Here's an article on the likelihood of market "bubbles" at Forbes.  Basically, the Nobel laureate professor in question, Vernon Smith, says that another 1999-2000 style market bubble is unlikely at this time because the memory of that bubble is simply too close.  We'll have to wait a while for another generation to enter the market.  The article, naturally, is a bit shallow...I'd like to see what this guy is saying and what his methods are in a bit more depth.  Maybe I'll dig around.

Oct 23, 2003...Again, yearlong winners took a beating, but losing groups performed in line with the general market.

Oct 22, 2003...Yearlong winners got hurt today, but yearlong losers performed in line with the general market.  We're continuing to wait for some sign that it's time to go bottom-fishing.

*****************************

I dug an interesting article up in a search on the "January effect".  Actually, all I was trying to do was see if this web site pops up when "January effect" is entered on Yahoo (it doesn't).  

Here's the idea put forth in the article (dated September 29):  we may see something of a January effect in October for the usual reasons:  tax selling (many mutual funds wrap up their fiscal years September or October) and window dressing.  There's a twist, though:  while some stocks have made very nice gains over the last year or more, many of these gainers still aren't anywhere near their highs of 2000 and 2001.  That means these funds could sell these sorts of stocks before the end of your fiscal year...nice gains over the course of the last year, but still losers from the time of purchase...take a tax loss, and then buy these positions back.  This offers a possible explanation as to why we are seeing the current gains in yearlong gainers.  Given this logic, you'd still expect the usual yearlong losers to prosper...we'll take a look at the end of the month.

The strategy is confounded just a tad by the "wash sell rule", which states that you can't buy back your tax losers immediately...you must wait 30 days.  But this isn't such a big deal...you buy similar companies that you didn't own.  Or simply wait 30 days.

If you buy this argument (sounds reasonable, no?), it's interesting to note that the charts of these stocks should have a well-defined pattern:  1)  Going back a couple years, you see lofty prices, 2)   a bit later, a big drop,  3)  within the last year, a nice upward slope and,  4)  near the end of September, a little pullback.  Now, of course, these stocks are engaged in step 5...more upward action.  In the cited article, Lucent (lu) is given as an example, and this is precisely what you see in the chart, right down to an end-of-September pullback (on a volume spike, I might add).  I'm not much of a chart watcher, but one might imagine a chartist going gaga over the beauty of this formation (for all I know, the technical guys would consider this ugly, but that's not my point).

At this point, Lucent is up nearly 25% from the beginning of October.  There's a miniscule bid/ask on the company, so almost all that 25% is profit.

Now imagine the same chart, but step 4 is completed in, say, the middle of February.  Same chart, but step 5) could be very different given the fact that nobody does tax selling or window-dressing in the middle of February.  It points to the possibility of using charts in conjunction with seasonal considerations. Or, more strongly, it suggests that seasonality can be primary over charting considerations.

As always, things are probably a bit murkier than the above would have it.  After all, we're talking about mutual funds whose fiscal years end in either September or October (supposedly, one third of all mutual funds).  So you've got simultaneous tax-loss selling and buying.  I'll try to take a look at precisely which stocks gained in October at the end of the month, and see what makes sense and what doesn't.

Oct 21, 2003...We're seeing a continued trend toward gains in yearlong winners.  Today, you could have made 2.5% by grabbing the stocks with the highest 4% of yearlong gains, while the market was only up about 0.5%.  

The trend started at the beginning of the month and hasn't quit.  This is a bit unusual...normally, one would be seeing losers, especially September losers, getting a bigger piece of the action.  Note that the trend toward gains in yearlong losers from June to September never really manifested, so maybe we're seeing a delayed reaction.  Also, it's been a positive year for the market in general, so it's not like there are hoards of beaten-down stocks to be picked.

It'll be interesting to see when this trend reverses.  My own guess...soon.  It's not so unusual to see yearlong gainers prosper in early October, but now it's the 21st.  You have to go back to 1995 to find anything similar.  November 1995, for what it's worth, did reward yearlong losers.

    Copyright © 2007 Stockwarrants.com. All rights reserved.