If you look for a pattern to predict the direction of the stock market, you'll find it.
That's the skeptic's takeaway from an intriguing paper from Robert Novy-Marx, a finance professor at the University of Rochester, in the current issue of the Journal of Financial Economics.stocks
No, he doesn't discuss the predictive qualities of hemlines, Super Bowl victories or Sports Illustrated Swimsuit Edition covers – quirky indicators that can attract a lot of attention because of their obvious lack of causality.
But he does venture into similar terrain, with observations that would surely draw chuckles from value investors such as Warren Buffett.
Updating the research from others, Mr. Novy-Marx looked at U.S. political leadership, weather patterns, sunspots and the alignment of planets (Mars and Saturn, in particular) to see if they bore any relationship to stock market activity – and he found it.
"The results are striking, and quite surprising," he said in his paper. (He did not respond to requests for an interview.)
Stocks have performed a lot better under Democratic Presidents, apparently because investors fear for the economy when Republicans are in charge. Stocks also have performed better when New York – the centre of North American stock exchanges and the home base for many traders – was cold in any given month. It's still a bit chilly out there.
Sunspots, or dark patches on the sun that proliferate in roughly 11-year cycles, provide another strong indication of where stocks are headed. High levels of solar activity affect our ability to process corporate information, you see, giving nimble investors an opportunity to exploit a slow reaction to news.
Hey, didn't the peak of the Dutch tulip mania, the collapse of the South Sea Bubble and Black Monday occur at the bottom of the solar cycle? Good news: We're at the top of the cycle.
As for the planets, their proximity to Earth is important – and their proximity to each other, and to asteroids.
"The market performs significantly better when Mars and Saturn are opposed," Mr. Novy-Marx said. "Times when Mars and Saturn are struggling for dominance and their energies are polarized appear to be particularly propitious times to invest in the market."
Okay, by now you must be wondering if someone – not me, honest – is pulling your leg.
What Mr. Novy-Marx is getting at here, with nothing more than a hint of sarcasm, is this: Previous studies examining weird stock market indicators to find money-making inefficiencies are flawed.
Yes, the numbers add up. But using those numbers to predict the future is another matter. Some observers call it "data mining," or the use of select bits of the past to form spurious conclusions.
You would have to search very hard to find an investor who has formed a strategy based on sunspots or the position of Mars, but there is no shortage of investors who consider equally suspect relationships in the hope of scoring easy returns.
Consider these popular patterns: The January barometer (as goes January, so goes the rest of the year); sell in May and go away (stocks tend to perform poorly until October); Santa rallies (stocks rise between Christmas and the New Year); and the U.S. presidential election cycle (the two years before an election are best for stocks).
You can find impressive numbers to back them up, but not enough to form a winning investing strategy. If you sold in May, 2013, you would have missed out on gains of 11 per cent by October. And although the S&P 500 fell nearly 6 per cent in January, the month hasn't been much of a barometer, yet: The index has since rebounded 8 per cent.
If you don't believe me, then consider studying the phases of the moon: One study cited by Mr. Novy-Marx concluded that a full moon can make investors more risk-averse, lowering stock market returns. The next full moon is on Wednesday.
David Berman