No stock market trend runs forever. Human nature eventually causes every trend to grind to a halt.
The tale is virtually always the same. A few savvy investors initially spot a repetitive trend and adjust their trading behaviour to profit from it. For a time, they enjoy the profits associated with their discovery. Then other investors notice the same opportunity and modify their trading behaviour.
As more investors hop on the bandwagon, changes occur in the underlying money flows that initially created the trend.
As an example, if you noticed that the stock market usually rises in November, you might move some money into shares in October to catch the expected up-move. In due course, others would also spot the trading opportunity and advance their own planned investments by a few days to catch the expected bounce. Eventually, November profits would falter due to a reduced level of fresh cash being committed to the stock market in November.
We now may be witnessing a real-world example of this trend destruction.
For many decades, the UK stock market calendar was neatly divided into two segments. Prices virtually always rose in November to April while May to October was nearly profitless over the long run.
The statistics are startling. From 1980 to 1999, shares rose in the good half of the year 19 times versus just one decline. The average annual gain was 12 per cent. The only exception to the rule was a small drop of just 3 per cent.
By contrast, shares rose just half of the time during the weak half of the year. Recall that this period encompassed one of the greatest bull markets in history.
As the graph shows, the profitability of November to April has significantly weakened since the new decade began. Only one year in the last 10 beat the long-term average. Prices rose just four times out of the last seven tries.
The reverse has occurred in the former bad half of the year. Shares rose in six of the last seven years. The single exception to the rule was triggered by the abnormal events surrounding Lehman’s collapse last year.
It is too early to make a final call on the death of the ‘November-May’ profit window. But recent results suggest the world may have significantly changed.
Last week, I also noted the launch of a new fund that will invest in companies with a high number of women in senior management. But three issues about this concept trouble me.
First, the fund is fronted by three public figures: the former prime ministers of New Zealand and Canada plus Cherie Blair, wife of the former UK leader. I have little doubt that each is quite bright. But I wonder what exactly each of the three knows about the world of investing?
I also question the validity of research offered by the fund manager linking the number of female top managers with corporate out-performance on various profit metrics. Much of the evidence is unimpressive. In statistical terms, the sponsors do not appear to understand the difference between correlation and causality.
One possibility is that a high female head-count actually does trigger corporate out-performance just as the fund sponsors claim. But an alternative explanation is that above-average gains are due to an unrelated cause – perhaps a talented top manager who brought women to the company as part of a much broader programme of change, renewal and growth.
For anyone wishing to play the statistics game, here is one stat that fund supporters will have trouble arguing against. Official statistics show that Asian shares significantly out-performed US shares since the current bull market began in March. However, 89 per cent of all US companies have a woman on their boards. The comparable figure for Asian companies is one out of five. Based upon this correlation, women might be the problem, not the solution.
Take my mischievous statistic with a grain of salt. There is an old in-joke among statisticians in which a numbers man advises his boss: “Just tell me what you need to prove and I’ll provide the figures to support you”. The truth is that there are few trustworthy statistics to support either side of the debate.
Statistics aside, my main problem with specialty funds like this one is the disadvantage investors create for themselves by limiting their universe. Shares in Galiform, the kitchen cabinet producer, are up by more than 400 per cent since the current bull market began in March. It has been one of the better performers in the FTSE 350. All seven board members are male.
Another strong performance was turned by Small-Cap constituent Avis Europe, the auto rental group. Its shares gained almost 900 per cent since March. All nine of its board members are male.
To my way of thinking, placing limits upon an investment universe could satisfy a desire for social justice. But if your goal is to boost a retirement nest egg, investing in any sort of ethical fund is like being forced to swim across a wide lake with one hand tied behind your back.
Stock market historian David Schwartz is an active short-term trader writing about his own trades and strategies. Send any comments or suggestions to tradersdiary@ft.com
