Most Popular ArticlesSeptember 8, 2009
A scientific test
Let us try an experiment. Instead of taking the currently constituted months of September, instead put the equity market returns for all of the individual September trading days in a basket. (We know that this basket has a negative bias, but bear with us). From this basket we repeatedly sample the days – thirty at a time - to determine the performance of a randomly constructed month of September.
This is an interesting approach to overcome the data mining issue, and we congratulate Andrew Moe for conceiving of this experiment. He writes as follows:
When comparing the months composing September to a random basket of days the results are random. Attempts to find seasons of non-randomness are frequently subject to data mining bias, as the same permutation test debunking the September drift is easily used to identify (falsely) statistically significant periods.
The study. Running a bootstrap permutation study on Dow data from 1960 to 2008 we estimate the empirical distribution of differences in monthly return between September and other months. We test the hypothesis that a random September is no more bearish than a composition of random days sampled with replacement. We find that the mean difference between populations is 0.0695%, yielding a p-value of 0.3612 – random.
Our take
Here are four good reasons to ignore the September weakness articles:
- This is a widely advertised theory. Even if you do not believe in completely efficient markets, one would expect some anticipation.
- On September 1st, we had a decline of nearly 2%, exceeding the historical monthly decline (S&P 500 since 1929) of about one percent. Should we now expect positive returns for rest of the month?
- The above experiment shows that the September pattern is not a statistically significant deviation, at least over the last 48 years.
- Other seasonal methods have not worked well in this time of turmoil. Those who took the advice to “sell in May” would have missed out on the recent market rally.
Admittedly, we do not know whether stock prices will move higher or lower during the rest of September. We do expect trading to reflect fundamental information about economic changes, as well as perceptions and trader lore.
Jeff is a former college professor and consultant to government agencies. For 22 years he has worked in financial markets, providing research, managing accounts, and serving as an expert witness. His company, NewArc Investments, provides account management for individual investors as well as customized strategies for institutions.
Readers can find several other articles on this topic by using the search box on our blog. We also have articles on correlation and causation, and many specific applications to trading.
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