July 3rd
The Smart Profits Report: Issue #435
Tuesday, July 3, 2007
July 3rd: A Great Day To Own Stocks & The Story Behind The Stats
By D. R. Barton, Jr.
Quantitative Analyst, Mt. Vernon Research
The stock market rose again today - and it’s no fluke.
According to the Stock Trader’s Almanac, July 3 is actually a great day to own stocks in the U.S. market. From 1954 until 2004, the stock market (as represented by the S&P 500) made gains on 66.7% of the July thirds. Even more impressively, from 1984 until 2004, the stock market rose on 76.2% of all the July thirds.
So, armed with this data, should you run out and look for calendar dates where there is a statistical tendency for the market to be up (or down)? The answer is: It depends. You have to look at the issues behind the data. Here’s why…
July 3rd… And The Statistics Behind It
You don’t want bet too heavily on data that are on shaky statistical ground. And you really don’t want to invest, based on ideas that have little or not fundamental or theoretical basis for the behavior. Let me show you what I mean by dealing with the statistical issue…
Over a 21-year period (1984-2004), stocks rose on 76.2% of all July 3rds. Sounds great, doesn’t it? But if we analyze at the data, it becomes much less compelling.
For a start, any time someone states a long period of time (like 21 years), it sounds like a long and impressive track record of success. But remember… we’re only looking at one day in each of those years!
And because the stock market is only open five days a week (because of weekends), we’re now really only talking about a tendency that happened on 15 data points spread out of 21 years! So while the statistic might sound interesting, it’s not significant (for clarity, the period between 1954 and 2004 had about 37 tradeable July 3rds, so that becomes more interesting, statistically).
The Beliefs Behind The Statistics
It’s pretty easy to make a case that stocks rising on July 3 makes sense. It’s the day before a major U.S. holiday. But the fact that markets rise because of a general positive attitude among investors is not a new idea, and researchers have already pored through some useful data to show that markets have a general tendency to rise before holidays for this very reason.
So betting on a July 3 rise has some merit in the end. But what about other days that have a higher tendency to go up, based on previous years?
Take October 3, for example. Between 1954 and 2004, stocks rose on October 3 in 70.6% of the cases.
There is no real reason why October 3 should be a great date for stocks. So should you buy large positions for that trading day? Probably not. With no underlying reason to support the data, it would not be prudent to invest based on this one analysis. It was by chance that it was much better than average from 1954 to 2004.
Invest On A Solid Foundation, Not Statistical 50/50s
If you analyze data for hundreds of data points (like days of the year), we would expect a bell-shaped curve in the results. Most of the days would be clustered around a 50/50 chance of the market rising or falling, and the rest would be distributed around that mean (or average value).
However, a few would be distributed pretty far away from that average value just by chance. So while putting statistics and underlying fundamentals together can sometimes give you a useful edge in the markets, just make sure that your investments are first built on a sound foundation.
Great trading,
D. R. Barton, Jr.
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Today’s Smart Profits Action Center
- Today was another good day for shareholders, extending the successful track record of the July 3 date. The Dow, Nasdaq and S&P 500 tacked on 41.87 points, 12.65 points and 5.44 points respectively at the early close (1:00 PM)
- In addition to the traditionally positive pre-July 4 mood, investors also took heart today from a better-than-expected factory report and a still-sizzling M&A market. The Commerce Department said U.S. factory orders in May declined by just 0.5%, compared with estimates that called for a 1% drop. Meanwhile, Kraft Foods tabled a $7.2 billion bid to buy French counterpart Groupe Danone and Teck Cominco, a Canadian mining firm, offered C$4.1 billion ($3.8 billion) for its fellow north-of-the-border miner Aur Resources.
- But beware… while the third quarter has started strongly for stocks, the days following July 4 are usually negative, as volume rises and investors take gains. In addition, the CBOE Volatility Index (^VIX) has risen from a June low of 12.43 to 14.91, indicating that investors are more concerned about the market falling.
Related Articles:
- The Market Volatility Index: Using The VIX To Straddle And Strangle Stock Options
- The VIX and VXO: How You Could Have Predicted The Market’s Recent Meltdown
- Greed & Fear: Gauge The Fear And Greed Factor To Boost Your Investment Success
The Chart Of The Week
While the U.S. markets continue to battle below their June highs, emerging markets are still rocking. Represented by the iShares MSCI Emerging Markets ETF (NYSE: EEM) shown in the bottom graph below, you can see that emerging markets are still making new all-time highs. But beware… emerging markets also fall faster than the U.S. indexes…
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