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This article appeared in the Economist...> > <A
href="http://www.economist.com/finance/displayStory.cfm?Story_ID=824707";><FONT
face="Times New Roman"
size=3>http://www.economist.com/finance/displayStory.cfm?Story_ID=824707<FONT
face="Times New Roman" size=3>> > Celestial Investing> >
What a Little Moonlight Can Do> > Oct 18th 2001> >
How the sun and the moon move markets> > WHEN ace traders call
themselves "Masters of the Universe", they> speak truer than they know.
There is a growing, heavenly body of> evidence that share prices are
influenced by forces from outer> space-well, the sun and the moon,
anyway. Master these> inter-planetary forces, and you master the
markets.> > Seven souls have boldly gone where no economists have
gone before,> producing no fewer than three new papers
quantifying> extra-terrestrial influences at work in world stockmarkets.
David> Hirshleifer, of Ohio State University, and Tyler Shumway, of
the> University of Michigan, have taken a long look at the sun. Across
26> stockmarkets, in 1982-97, they found that, on days with more
sunshine> in the morning than usual, shares generated above-average
gains, and> lower gains on unusually cloudy days. After taking sunshine
into> account, other weather conditions such as snow or rain turned out
to> have no impact on share returns.> > The effect of the
sun seems to have been quite big. For shares traded> in New York, for
instance, annualised returns on perfectly sunny days> averaged 24.8%,
compared with 8.7% on perfectly cloudy days.> Moreover, unlike some
stockmarket "anomalies" discovered by> economists, investing by the sun
would have been more profitable than> simply investing in the market
index, even after subtracting trading> costs. Alas, this does not
guarantee profitable trading in the> future. Even assuming the effect
really exists, investors, now they> have been alerted to it, will
probably arbitrage away any excess> returns to be had by exploiting
it.> > The other two papers, both published by the University of
Michigan,> look a little closer to home, at the moon. Kathy Yuan, Lu
Zheng and> Qiaoqiao Zhu examined share returns in 48 countries until the
end of> July 2001, from start dates as far back as 1965. They found that,
on> average, daily returns were much higher around new moons than
full> moons, when investors are presumably sprouting fangs and
howling> rather than buying shares. Returns were 8.3% lower in weeks with
a> full moon than ones with a new moon. The lunar effect held in 43
of> the 48 countries, and investing by it would have been profitable
even> after trading costs.> > Ilia Dichev and Troy Janes
reach a similar conclusion from a study of> 100 years of American share
prices, and at least 15 years' data in> each of 24 other countries. Daily
returns around new moons were> roughly double those around full moons.
The lunar effect is strongest> outside America. All seven economists
insist that their results are> not the product of data-mining-crunching
the numbers in search of any> interesting pattern they can find. Rather,
the results are the latest> manifestation of behavioural finance, which
seeks to show how> psychological patterns explain apparent market
inefficiencies.> > Still, although it is widely believed that the
phases of the moon> affect behaviour, psychologists have yet convincingly
to prove it.> The behavioural economists reckon this may be because
psychologists> have focused on trying to link the moon to extreme
behavioural> problems in a few disturbed people, rather than to more
humdrum> lunacies affecting humanity as a whole, including a bias
against> shares around full moons.> > There is, on the
other hand, stronger scientific evidence that> sunshine puts people in a
better mood, as well as making them more> credulous. You will find that,
even as you reach for your diary for> the next new moon, the sun is
surely shining.> > > > A Note from Bill
Meridian:> > I began the certification process for the Certified
Market Technician (CMT)> with the Market Technicians Association (MTA).
The CMT process consisted of> two examinations and a research paper. Long
before I began, I cleared the> study of the lunar cycle with the founders
and the senior members of the> MTA. Actually, they could not refuse for
several reasons. First, Arthur> Merrill, an honorary lifetime member of
the MTA, had conducted an informal> study of stock prices at new and full
moons. Second, one of the required> text books from the MTA by John
Murphy states that there is a 28-day cycle> in stock prices. He wrote
that some people believe that the cycle is linked> to the moon. Third,
and most importantly, the MTA conferred upon W.D. Gann a> posthumous
lifetime achievement award. Gann said that planets affect the> markets.
If the MTA disagreed with this position, why did they give him an>
award?> > The topic was an analysis of the effect of the lunar
cycle on US stock> prices. I passed the two tests, and then submitted the
topic, only to find> that it was rejected. When I inquired, the reviewer
told me that it was> impossible for the planets to affect stock prices.
Further inquiries led> nowhere, so I complained to the MTA. The proper
procedure was for this guy> to submit the topic to a review committee,
which he had failed to do. The> MTA removed him from the position. Next,
the study was completed and> submitted.> > The reviewers
not only did not believe in planetary affect, they disbelieved> cycles.
They erroneously claimed that I said that there was a lunar cycle.> My
paper was designed to find out whether there was or was not a cycle. No>
claim was made as to the existence of a cycle. They criticized the study
on> a number of points, and I countered each criticism. They refused to
accept> the paper. I finally brought the matter to the president of the
MTA, who> decided that the study was acceptable. This process took one
and half years> to complete.> > There were no indications
of trend changes in the DJIA around new or full> moons from 1915 to 1995.
The changes tended to occur between the lunations.> This explains why Mr.
Merrill did not find highs or lows in his analysis.> The study indicated
that there is, on average, an upmove in the DJIA> commencing in the days
prior to the new moon and ending about 6 to 7 days> afterward. The
turning points tend to be between the new and full moons, on> average.
The study can be read, in abridged form, on the website,>
billmeridian.com.> > The studies reported in the Economist support
the findings. The researchers> have advanced the analysis of planets and
prices at the university level by> 20 years…from 1960 to 1980.>
> Bill Meridian
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