Monday is usually a bad day, traders sell the Friday before and buy back
stock on Monday. Whatever the reason, it shows that, like the January
Effect, well-publicized anomalies are often arbitraged out of the market.
Another calendar anomaly is that stocks do very well before major
holidays, as shown in Table 18-1. Price returns before the Fourth of July,
Christmas, and New Year’s are, on average, almost 14 times the average
daily price return. But this anomaly, like the day-of-the-week effect, has
changed dramatically in recent years. Although stock returns on the day
before July Fourth and Christmas have remained strong, returns on the
last day of the trading year have switched from a strongly positive 0.31
percent to a decisively negative 0.31 percent since 1990. The negative re-
turns on the last trading day in recent years are probably caused by a large
number of “sell-on-close” orders that are automatically executed to offset
a position in stock index futures. The downward movement of stock
prices generally occurs in the last 30 minutes of trading. Of course, it is
likely that once this pattern becomes widely known, it too will disappear.
Finally, there appears to be a diurnal pattern of stock returns. Evi-
dence has shown that there is usually a sinking spell in the morning, espe-
cially on Monday. During lunch the market firms, then pauses or declines
in the midafternoon before rising strongly in the last half hour of trading.
This often leads the market to close at the highest levels of the day.
WHAT’S AN INVESTOR TO DO?
These anomalies are an extremely tempting guide to formulating an in-
vesting strategy. But these calendar-related returns do not always occur,
and, as investors become more aware of them, some have moderated
while others have disappeared altogether. Still others have completely
switched, such as the behavior of stocks on the last trading day of the year.
Furthermore, investing in these anomalies requires the buying and
selling of stock, which incurs transactions costs, and unless you are trad-
ing with tax-sheltered funds, you may realize gains that could be taxed.
Nevertheless, investors who have already decided to buy or sell but have
some latitude in choosing the timing of such a transaction, might wish to
take these calendar anomalies into account before making their trades.
318 PART 4 Stock Fluctuations in the Short Run