Category Archives: Behavioral Finance

The trend is NOT always your friend….

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BitcoinDear Mr. Market:

How is it that through both bull and bear markets, you are constantly able to create new products and services that entice investors to take on risk beyond what they need in their investment portfolios?   Time after time, we’ve seen investors rush to get involved in the next great investment opportunity. Just looking at the last few years alone we’ve seen the Facebook IPO, Leveraged ETF’s, Day Trading, Managed Futures… and the list goes on and on.  Most recently we’ve seen a new “currency” hit the headlines and attract investors … Bitcoins.

This new digital currency has caught plenty of media attention with the price hitting extreme highs and lows.  Just in the last two weeks Bitcoins were worth as much as $260 apiece and then within days they dropped down to $100 a piece.  This decentralized digital currency allows for exchange without any regulations or protection.  It is based on an online programming code written by a group or an individual that operate under the name “Satoshi Nakamoto”.  If that doesn’t make individuals feel secure then knowing that they can never hold these ‘coins’ in their hands but instead can hold them in their online digital wallet definitely should! Continue reading →

Why You Might want to “Sell in May and go Away”…in April

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Sell in May and Go Away?

Dear Mr. Market:

Are you finally about to let off some steam and come back down? Everybody has been talking about this market correction but until last week you’ve been awfully stubborn and just keep inching higher. It’s now April 8th, so albeit a few weeks early, can we at least ask you about this whole “Sell in May and Go Away” concept?

For those that may not be aware of the old Wall Street adage, “sell in May and go away”, it is a belief that the market performs better in the months of November to April. Those that follow this strategy ideally sell their stocks in May and stay in cash until about Halloween. Does this have any merit? We wrote about this last year and wondered if it was once again data mining and essentially a statistical fluke. Analysis by Ben Bouman and Sven Jacobsen (2002) actually confirmed about 10% percentage points of stronger performance in 36 of the 37 markets they studied for the November-April time period. These results were more pronounced in the European economies. Other studies also point to the Dow Jones averaging about a gain of 7.5% in the Winter months while the Summer months lost 0.1%.

There are a number of factors on why this trend seems to have been fairly reliable dating all the way back to 1950. Year-end bonuses and the proverbial “Santa Claus rally” can sometimes help bump the markets up in the Winter months. Barring any unexpected negative catalyst and a typically mild Spring, the “summer doldrums” set in after all the first-quarter results are announced. Like it or not the extensive media coverage can really amplify an earnings miss or a hit and it’s not inconceivable to see a company drop or rise by 20% during this time. Today will bring us Alcoa Inc.’s results and officially kick off the earnings season. Continue reading →

Is the Stock Market Headed Higher or Lower?

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Dear Mr. Market,

tightropeHere we are…now what? You reached an all-time high this week with the S&P 500 breaking the previous record of 1,565 set in October of 2007. Congratulations! Although you’ve taken today off for Good Friday, here we sit at 1,569 and everyone is wondering …”what’s next?”.  Will you break out to even higher levels or is the expected correction that everyone is talking about becoming more and more of a given?

We ask you these questions because it’s times like this when many investors make critical decisions. Passing historic levels in the stock market can be more than just a headline. For some it’s a time of reflection and it allows the investor to see where they’ve come from since the last bear market or how they’ve done since the last time the market was this high. Breaking new highs shouldn’t be the trigger that tells an investor to reassess his or her strategy though.

Since nobody we know has a crystal ball, what we really want to know is how most investors are feeling in light of reaching these levels. Humans have a natural fear of heights. As a market gathers steam and prices rise most investors welcome that and typically “feel” good. A different feeling then creeps in when new levels are reached. Investors then believe with each new high that a reversion to the mean will occur and the market is bound to correct. Sure, the “writing is on the wall” and just about everyone we speak to thinks (feels) that the market will correct soon. This opinion is held the most by those that either have not participated in the recent market run-up or those that perhaps are trying to sell a different vehicle. Continue reading →