Further to my recent post on daily seasonality near the ‘turn of the month’, I repeated the analysis for Vanguard’s large cap value fund VIVAX, excluding dividends.
The equity curve represents holding the fund during calendar days 1,2 and 25-31. Trades are frictionless (12 per year) but the VIVAX expense ratio of 0.24% is included.
Compound annual return is 8.8% and the equity curve shape is very similar to the previous analysis using Fama-French data, as expected.
Return on cash during the 75% of days out of the market would add several percentage points to this annual return, at least until interest rates were cut in 2008.
It may also be possible to time trades to collect dividends, adding further gains. Current yield is 2.07%.
This series looks at US stock market seasonality on various timeframes. The Fama-French (FF) daily book-to-market (B/M) portfolios are used.
Marketsci has posted extensively on this topic, showing that “strong” and “weak” days tend to persist on a walk-forward basis.
This analysis is slightly different in that calendar days are used rather than trading days. Daily return is plotted against day of the month from 1984-2014.
The trendline shows that calendar days 1,2 and 25-31 have higher average returns than other days, irrespective of where the weekend falls.
Holding the FF large value portfolio on days 1,2 and 25-31 results in the following equity curve (frictionless). Annual return is 10.2% with an exposure around 25% and 12 trades per year.
It’s interesting that even during the last 2 recessions, these days perform well. (See 2000-2002 and 2008).
This may work better with the addition of short term entry and exit triggers but I have yet to investigate. The intent of the equity curve is only to illustrate the principle.
Next up: day-of-year seasonality.
Following the $NAMO buy signal, QQQ hit new highs today:
This signal is really only a way to measure a decent amount of selling then the beginning of a bounce. Unfortunately I do not have the raw data to run the stats. See the charts page for the current picture.
The $NAMO signal, and similar ones such as breadth thrusts (see Quantifiable Edges), should be more reliable when combined with seasonality and recession tracking. Seasonality is the subject of the next few posts.
The following charts show rolling annual returns for small-cap momentum, both absolute (red) and relative to the S&P 500 (blue). The upper trace exhibits a stable mean around 20% but annual return is negative every few years and requires fortitude, as with all long term investing.
The lower trace demonstrates that the strategy can underperform the S&P 500 in some years, notably during the tech bubble in the late 1990s. Since then, annual underperformance has been rare and limited in magnitude.
Update: 2 Feb, triggered on 30 Jan (Thursday).
Update: 29 Jan, no up-bar on $NAMO yet:
$NAMO hit -41.67 at the close. 20 point reversals from below -50 tend to signal lows:
The interaction between value and PEAD is discussed in a paper by Yan and Zhao. PEAD is one of the most researched anomalies in the last 4 decades since its discovery by Ball and Brown. Value stocks outperform following positive earnings and positive market reaction to earnings (EAR):
Excess returns are almost 3% a quarter, since 1984, in addition to the segment return (i.e. total return of 8% per quarter or 36% annually!). This paper does not control for magnitude of earnings surprise. However, Chordia and Shivakumar show that returns increase with SUE (standardized unexpected earnings):
Therefore there may be opportunity to further improve on Yan and Zhao’s results by sorting on SUE.
Robert Novy-Marx finds that momentum is driven by price change in the first half of the preceding year, irrespective of recent performance. Most studies use the whole year price change, excluding the most recent month.
To investigate this result, I revisited my previous analysis of S&P small cap stocks since 2008 which showed that annual gains of about 25% led to an average 10% gain next quarter:*
* These data are out of sample relative to the Novy-Marx paper.
The correlation between next quarter return and return in the first half of the preceding year is much closer (r^2 increases from 0.66 to 0.84):
Investigation is needed on whether any characteristics of recent performance can segment returns even further. Value and earnings surprise would be logical starting points.