- The Number One Reason Why Investors Should Avoid Gold ETF’s
- Calculating And Using RS Lines For Intermediate-Term Trades
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Interactive Data is headquartered in Bedford, Massachusetts and has over 2, employees in offices worldwide. Pricing, evaluations and reference data are provided in the U. This release was issued through The Xpress Press News Service, merging e-mail and satellite distribution technologies to reach business analysts and media outlets worldwide. Contact Us. News in Focus Browse News Releases. Multimedia Gallery. Trending Topics. Business Technology. The IPO effect has baffled academics for several decades and is the result of three unusual price patterns that are typically associated with new public stock offerings:.
Meanwhile, separate research from Jenkinson and Ritter seems to illustrate that this anomaly is a global phenomenon:. The abnormal returns for IPOs on the first day of trading is another rejection of the efficient market hypothesis and a number of explanations have been put forward for its existence.
The Number One Reason Why Investors Should Avoid Gold ETF’s
Some authors argue that issuers voluntarily leave money on the table in order to create a nice start and good feeling among new investors in the stock and therefore allowing issuers to have more successful Seasoned Equity Offerings in the future. Others argue that IPO underpricing can act as risk compensation for the underwriter. One other study found that banks can lose IPO market share if they underprice or overprice too much Dunbar. To go alongside this anomaly, there is also evidence that IPOs go on to perform worse than the market overall.
So it seems IPOs typically return above average returns on the first day of trading but then go on to underperform. This is well under benchmark returns.
Whatever the explanations, there do seem to be anomalies persistent in IPOs that could be available for the average investor to take advantage of. More research may be needed but the general strategy is to go long IPO stocks on their first trading day. You can also short IPO stocks to capture underperformance in subsequent years.
Investing in distressed securities involves a bet that a company experiencing severe financial difficulties is essentially not as distressed as the market believes. When a company undergoes severe hardship and becomes distressed, many investors react by selling shares and this can drive the stock price below fundamental levels.
Chapter 7 bankruptcy will involve liquidation of assets which means investors could still get a payout. Meanwhile, under a Chapter 11 bankruptcy, the company is given permission to continue trading and reorganise which could lead to significant improvement down the road.
Calculating And Using RS Lines For Intermediate-Term Trades
The distressed securities anomaly holds that some distressed securities become undervalued through forced selling and investor psychology. To really succeed you need to understand balance sheets and the logistics of distressed companies. Ideally, you should have experience of picking companies that could offer a return after liquidation of assets or after a company reorganisation. There is some evidence that companies that undertake stock splits go on to outperform the market while those that undertake reverse stock splits underperform. Usually the company splits the stock to bring the share price down and make it more affordable for investors to purchase blocks of shares.
Therefore, the stock split effect is tied in to the momentum anomaly. There is also evidence from Kalay that stock splits cause analysts to revise earnings forecasts by around 2. Here, the explanation is that reverse stock splits are typically implemented in poorly performing stocks. Such companies typically implement the reverse split not as a sign of quality but because they need to trade over a certain price level to maintain exchange listing requirements.
You can implement a portfolio that consists of going long stocks after stock splits and going short stocks after reverse stock splits. Short trades must be managed closely but long trades can be held for up to 50 days. Trading off inside information can be illegal but directors are allowed to purchase and sell shares in their companies provided they do so in a timely manner and disclose their transactions with the SEC.
It would make sense that company directors are best placed to evaluate the value of their businesses so the insider trading anomaly has been a fruitful line of inquiry for many researchers over the years. In , a paper from Finnerty concluded that increased insider purchases led to excess returns of 4. In more recent research from Jeng , the authors found that sales did not produce any meaningful results but insider purchases led to annual excess returns of as much as Nevertheless, the anomaly still shows grounds for development particularly in smaller cap stocks that are out of the realm of big firms.
This is illustrated in the following chart taken from the book:. There are a number of online resources you can use to track insider trading such as Insider Monkey and SEC filings. You can then go long small cap stocks with strong insider purchases. You need to be quick as most of the return comes in the first few days.
The concept behind this anomaly is that a company with low levels of accruals in their earnings has more real cash flow coming in and therefore more certain earnings. A company with high levels of accruals, on the other hand, has less cash-related earnings and may therefore have less certain earnings. The logic of the accrual anomaly is that most investors fail to account for the accrual component in earnings releases and therefore stocks with lower levels of accruals in their earnings become undervalued.
The Accruals anomaly is quite a robust anomaly with a lot of research behind it and it seems to make rational sense. According to data from Quantpedia , the accrual anomaly can be used to pursue annual returns of around 7. The following chart taken from a paper called Persistence of the Accruals Anomaly shows the abnormal returns associated with the anomaly going back to As with many of the anomalies on this page, the accruals anomaly may also be combined with other factors such as momentum.
It is also shown to be effective in international markets. Research from the same paper mentioned above also shows that a larger number of stocks in the portfolio increases the statistical significance of the effect. In other words, you can increase the probability of success with this strategy by incorporating more stocks into the portfolio : Strategy:. You can sort stocks into deciles and go long the stocks with the lowest accruals and short the stocks with the highest accruals. The buybacks anomaly suggests that companies that buy back repurchase more of their own shares tend to outperform.
In one study, researchers Amini and Singal looked at 15, buyback announcements between and They found that companies that repurchased shares shortly before an earnings release went on to show persistent positive raw returns of 3. The buyback anomaly also appears to make logical sense. Company directors are best placed to know whether their company has had a good quarter therefore stock buybacks shortly before earnings releases may contain useful information for other investors to take advantage of.
The equity issuance anomaly is a similar effect and was discussed in the same paper mentioned above. This time the researchers looked at 19, seasoned equity offerings not IPOs between — and found the opposite effect. Shorting stocks that had recently issued new equity SEO prior to an earnings report was shown to produce a significant net profitable return.
The explanation is that equity issuance is a bearish signal often done to raise money in a flagging business and that this gives off information that predicts negative earnings. The first chart below shows how returns improve in the days following earnings in stocks that have buybacks. The second chart shows how returns fall in stocks that initiate seasoned equity offerings:. You should go long stocks that announce share buybacks in the two days before earnings announcements and hold for up to 15 days.
You can short stocks that announce equity offerings two days before earnings announcements and hold for up to 30 days. Investor mood can be affected by sports events and there happens to be more than one Super Bowl pattern related to the stock market. The Super Bowl indicator, introduced in by sports writer Leonard Koppett , holds that if a team from the AFC wins the Super Bowl, the stock market will decline in the following year.
While a win from the NFC will lead to a rally.
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The other pattern suggests that stock markets often rally in the week directly after the Super Bowl. CXO advisory found that from — , the market rallied an average of 0.
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This compares to an average return of 0. Although this does suggest some upside edge in the week after Super Bowl, the sample size is relatively small so caution is still advised. To take advantage of the Super Bowl anomaly, you should go long stocks or index futures on the first trading day after the game and hold the trade for five days. The explanation for this stock market anomaly is that many people wait until the very last minute to pay their taxes and there is then a simultaneous rush to get their money into an IRA on the final day.
Brokers then end up overwhelmed and lodge a number of the trades on the next day open. The Dogs of the Dow strategy has been around since at least the early 90s and exists in a couple of different forms. Each year the portfolio is rebalanced so that you always hold the 10 stocks with the highest yield the dogs. Since dividend yield often moves inversely to price, this is essentially a contrarian strategy where you are selecting some of the weakest performers from the index. According to this analysis from Steve Auger , the Dogs of the Dow strategy has been an effective one, outpacing the Dow index by a decent margin since Another variation of this strategy is to go long stocks that have been removed from market indexes.
This anomaly has been documented in the UK market with success. Hold for up to four months to capture the full reversal. This effect was shown to go back to and has increased over time. The FOMC drift effect is shown to be robust across other international indices but no effect was found in Treasuries. The authors also found that the drift is stronger when the slope of the yield curve is low and the VIX is higher indicating higher equity market volatility. The FOMC drift seems to contradict the efficient market hypothesis but it is easy to form a rational explanation for this anomaly.
Since a primary goal of the Federal Reserve is to maintain market stability, FOMC policy announcements often act to suppress market volatility or give assurance to market participants. In recent years there has also been a trend of lower interest rates and accommodative monetary policy. Short sellers may also refrain from entering short positions in the run up to FOMC announcements knowing that an accommodative decision may be coming up.