- Stocks rise about 5 percentage points more, based on this one factor -
Traders are on an eternal search for some "edge" that lets them beat the market. It turns out the answer was staring them right in the face.
The most reliable indicator has nothing to do with earnings or the Federal Reserve. Hang on to your hat: The returns of stock exchanges around the world are strongly affected by the phase of the moon.
In a nutshell, markets rise several annualized percentage points faster during the 14 or 15 calendar days around a new moon than they do in a similar period around the full moon.
That might seem pretty woo-woo. But when you think about it, there's a logical basis. It's well known that the moon raises the tides and increases the rate of homicides. Our bodies are mostly water. If the moon can move the oceans, why couldn't it drive traders' emotions?
Like anything that has to do with economics, there's a healthy debate about the effect of this "lunar cycle." But the evidence for stronger new-moon periods and weaker full-moon periods is growing:
The graph above, from the Dichev and Janes white paper, illustrates the findings. Annualized gains are notably stronger in the market days around the new moon (the red columns) than the full moon (the blue columns). All of the G-7 economies show the effect, to a greater or lesser degree. Go, Canada!
If the lunar indicator is statistically significant, the question becomes, "What do we do with it?"
Here's where reality raises its ugly head. Just because an indicator is measurable doesn't mean it's tradable (i.e., you can effectively use it). And even if an indicator is tradable, that doesn't mean it's profitable (you can make gains after paying transaction costs).
If the lunar indicator mysteriously reverses or disappears entirely, who are you going to complain to, the man in the moon?
For most individual investors, it's best to stick with tried-and-true long-term strategies: diversification across a broad set of asset classes, "the trend is your friend," and boring old stuff like that.
The lunar indicator is an interesting quirk that most of us may never be able to take advantage of. But it serves to teach us just how much wild stock-market action is the result of fallible behaviors that are deep-seated in human nature.
If the market truly obeys lunar influences, that says a lot about the way inexplicable manias and sudden crashes are driven by lunacy.