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Market Myths and Legends

Discussion in 'Forex Discussions' started by painofhell, Jan 19, 2016.

  1. painofhell

    painofhell Content Contributor

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    Many areas of life have adages that govern them; ‘A fool and his money are easily parted’ tells the English that you need to be well informed to keep your hard earned cash, the Russians say ‘Put everything on the grey horse, it’ll bear anything’ meaning that you should go for what appears to be a dull choice, it’ll come good in the end above others and the then there’s the Arabic adage, ‘Save your white money for your black day’ . It’s the same in securities trading and, by association, Forex trading too. Market myths and legends are the food and drink of traders and here we explain a few of the most common.

    Many of the market myths and legends offering warnings or recommendations for trading are based on experience but does experience always point accurately to the present and the future? Here we look at some of the adages and myths that seasoned traders tell the novices and we’ll leave it to you to decide which you’re going to take notice of or not!

    Buy the Rumor, Sell the News

    This saying is a regular amongst traders and is sound advice. It indicates that the time to buy is when a positive rumour is just building – preferably before everyone else gets to hear it! The second part of the saying tells us that by the time the rumour becomes fact, any gain in price will have already been factored in and so it’s the time to sell. The novice trader will often buy only when news breaks on a currency or stock and by that time the price may be already about to turn, leaving him confused as to why he lost on good news.

    Sell in May and Go Away (The Halloween Indicator)

    This warning is one of the market myths and legends that has been around for decades and purports to show that by selling any securities in May, investing the proceeds in cash investments, returning to the market at Halloween will prove more profitable. Various research papers have come up with contradictory evidence however the Stock Trader’s Almanac noted that average returns on securities between May and October since 1950 has been 0.3% – significantly lower than the return on short-term interest rates over the period. Contrastingly over the same period the November to April return on securities was 7.5%. The media often suggests that investors ignore the strategy, quoting short term trends as proof that it is a myth yet in the UK, the largest market in Europe, the adage has proved true more often than elsewhere.

    As to the reason why this should be, analysts point to a traditionally quieter spell in markets with holidays taking precedent over serious trading. There is also traditionally less business news with busy trading periods seeming to veer towards the winter months.

    Triple Witching Hours (Quadruple Witching Hour)

    This is a time when seasoned traders tell us to be short on stock as three main securities and one minor one expire in the last hour of trade on the third Friday of the months of March, June, September and December. The securities in question are the stock market index futures, stock market index options, stock options and single stock futures. Whilst this should normally not cause a problem, the expiry often leads to volatility in the markets as positions are squared. Trade can often go with or against the day’s trend making it probably a good time to be short.

    Friday the Thirteenth

    Friday the thirteenth is only a minor problem due to general superstition over the date. Whilst typically there are more accidents and deaths on the day, many of these are believed to be down to people being overly careful on the day and incurring problems because of an unusual routine. It’s rare that in the markets things take a turn for the worse but there is often a noticeable dip in volume as a result of some traders’ phobias.

    Black Monday, Friday or any day of the week!

    ‘Black’ days can get a little confusing for on the positive side, Black Friday is the first Friday after Thanksgiving in the US when the Christmas shopping binge begins. For retailers, security traders and the public it can be a very good day – anything but black. Black is also used to describe days of huge losses in security and currency markets including Black Monday; October 28th 1929, one of the worst days of the Wall Street Crash; Black Monday 19th October 1987 which saw the biggest single day fall in security values ever. Black Monday 8th August 2011 when the US credit rating was downgraded and so the list of ‘Black’ days continues.

    Superbowl Effect

    One of the many stranger market myths and legends is the outcome of the annual US Superbowl. Analysts who swear by the rule say that if a team from the AFC win the Superbowl, a bear market follows whilst conversely if a team from the NFC wins, it will be a bull market ahead. Verifying the statistics, website Snopes.com note that the rule has proved true in 33 out of the 41 years of the Superbowl, a significantly better performance than probability would suggest. Those keen to find a reason why say that winners from the NFL tend to come from more affluent states who, taking up the feelgood factor from their team’s win, invest confidently in the markets pushing up the prices whilst if their team loses, it sets in motion a depressed phase whereby they sell securities bringing about a bear run. This year NFC team Seattle Sea-hawks took the trophy and just for your information, the S & P 500 was at 1782.59 on the Friday before Superbowl 2014 and as at the beginning of April it’s up to around the 1890 mark – another win for the Superbowl theory!

    As January Goes For Stocks, So Goes The Year

    This piece of received wisdom says that you should see how securities perform in January and make investment decisions for the rest of the year based on that. It seems that for the last 50 years of the 20th century, the January Barometer was correct 92.5% of the time.

    Hemlines

    A fun, if rather sexist theory now. It’s been purported that as hemlines of skirts rise, so do economies. This has been proved in the boom times of the sixties with the miniskirt, its revival in the eighties and, as the current recovery gains momentum, the appearance of short skirts once more.
    Complex psychology lies behind the theory, again, much of it sexist. With apologies to female readers, the theory suggests that as good times approach with the prospect of wealthier men, women show more of their legs to attract them. When a downturn arrives, they don’t want to attract the attention of poorer men and so cover up!

    Skyscraper Theory

    This theory purports that when a country completes what will then be the world’s tallest skyscraper, its economy and its securities market will contract. The theory has been proved in 1931 with the Empire State Building, 1974 with the completion of the Sears Tower in Chicago and the Petronas Towers, Malaysia in1998. The contra-theorists point out that many such constructions are commissioned when times are good and due to the timescale of cyclical trends in markets, are completed at the start of a slowdown.

    Presidential Effect

    A rather confusing one now…
    Many pundits say that the party which wins the US presidency has a direct effect on the stock market. Whilst this seems to be common sense dependent on the policies of the Democrats and the Republicans, the theory hasn’t worked in practice meaning no one is sure which party represents bulls and which represents bears!

    October Crashes

    Dealers are always worried about October and that’s why it’s tagged onto the end of the ‘Sell in May and Go Away’ adage. In 1929, 1987 and 2004, three of the worst financial crashes in history all occurred in October. An economics professor puts the record down to false correlation, simply reading into statistics what you want to see, others think the event is true because of the nervousness that pervades trading in the month because of previous events.

    Hindenburg Omen

    Not so much one of the market myths and legends and more of an indicator, this is simply a dramatic name for the confluence of five linked technical indicators appearing at the same time. It was due to be called the Titanic Effect but that soubriquet had already been used elsewhere. It’s meant to predict a crash and every downturn of note has been preceded by the ‘omen’ although a ‘crash’ has only been predicted on one in four occasions. The timing of the prediction is also a moot point with the downturns beginning within a week, all the way up to four months later.

    Golden Cross

    Another one for the technical geeks. The Golden Cross is when the short term moving average crosses above its long term moving average or resistance level. Whilst the rule seems to hold fast, cynics say that reading of the data in the run up to the event leads to media hype causing the rule to come true. The old case of the ‘self-fulfilling prophecy’.

    Death Cross

    Another technical indicator, the Death Cross, is formed when the 50 day moving average crosses the 200 day moving average whilst moving downwards. Interestingly, research into the Death Cross shows that for a century up to the 1990s the Death Cross was always followed by a market downturn but for some reason the indicator stopped working 22 years ago. The investigator put the failure of the indicator in modern times down to the fact that the two indicators have a much smaller influence today that prior to the 1990s.
     
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