Anomalies of the Financial Markets

Last time, we brought up the subject of the irrationality of the stock market. Today we're going to talk about even more curious things, things that are known as stock market anomalies. Despite their name, these anomalies happen often or even regularly.

1. The hemline effect

Very well known, even if debatable, this effect says that when the long skirt is the centerpiece of the season, the stock market falls. Why? No reason. Just an observation that the fashion for long skirts coincided with the crises, such as the crises of 1987 and 1929. Are you convinced? Blame the couturiers!

2. 56-weeks pattern

A little more complicated, this reason explains why there would be a larger liquidation of positions 56 weeks after a rise in the stock market. This increase must be more than 5 percent for 20 consecutive trading days. This trend has been very persistent for the past 40 years.

Figure 1. 56-week pattern. Source: Investopedia

 

This time, there is a more logical explanation. When institutional investors win, they often prefer to keep winning stocks a little longer than a year to benefit from reduced taxes a year after.

3. January effect

The January effect is a bit similar. This is when the prices of stocks that had performed poorly in the previous year increase in January. The explanation is simple. At the end of the year, institutional investors sell their unprofitable stocks to optimize their taxes.

4. Flash crash

The flash crash is a rapid change in the stock price, unrelated to financial or social events. Most often, these events are explained by computer bugs. For example, on May 6, 2010 the DOW dropped over 1000 points in 10 minutes! Even though the industrial index regained 70% during the day, the consequences were devastating. The cause of this crash was attributed to a futures trader who had placed numerous orders to buy and sell e-mini contracts simultaneously. This behavior, not being expected by the computer system, caused a system failure.

5. Triple Witching Friday

This sophisticated name refers to three simultaneous events: the expiration of both S&P options, indices and futures. In folklore, the hour of witchcraft or the hour of the devil is an hour of the night, usually between 3 and 4 a.m., associated with supernatural events, where witches, demons and ghosts are believed to appear. and be at their most powerful.

Figure 2. Three witches. Source: Book by Grégoire Solotareff