The Most Bizarre Market-Timing Chart Ever?
When it comes to strange market timing patterns, for the longest time we thought that it would be impossible to top the following chart by the New York Fed from July 2012, one we dubbed the "Chart of the Year", showing that the cumulative "bullish" return of the S&P 500 on just the day preceding FOMC meetings resulted in some 800 points in upside in the broader market.
The NY Fed described this truly arcane phenomenon as follows:
We show that since 1994, more than 80 percent of the equity premium on U.S. stocks has been earned over the twenty-four hours preceding scheduled Federal Open Market Committee (FOMC) announcements (which occur only eight times a year)—a phenomenon we call the pre-FOMC announcement “drift.”
Surely, this is as bizarre as any "market timing" chart can get? Not so fast.
According to a paper by economists at UC Northwestern University and UC Berkeley, Anna Cieslak and Adair Morse and Annette Vissing-Jørgensen, another, even more surprising trading pattern using FOMC announcement has emerged. Specifically, anyone who engaged in the simple "even" strategy of buying the stocks of the S&P 500 on the day before a Fed policy announcement, selling them a week later, then buying them again the following week and sticking with the pattern until the subsequent Fed meeting generated a whopping 650% return since 1994, far outperforming the inverse "odd" strategy which shocking had a negative return over the past two decades years, and jsut as surprisingly, outperforming the market's own 505% return during this period.
Behold what may be the most bizarre pattern chart yet:
As the WSJ adds, "the pattern of stocks performing better in even weeks of the Fed cycle—the week of the policy-setting meeting, two weeks after it, and so on—is persistent. Given financial markets' complexity, though, it is possible to find many interesting, significant-seeming patterns that are really just matters of chance."
The pattern appears robust, with clear peaks and valleys in returns during even and odd weeks that appear statistically significant. Splitting the data into three subperiods—1994 through 2000, 2001 through 2007 and 2008 onward—they found the pattern still held. International stock returns follow it as well.
So what is causing this miraculous "get rich quick and just trade alongside the Fed" pattern? The answer is not clear:
The dates for the eight policy-setting meetings the Fed sets each year come at different times of the month, and have moved around over time, so they haven't regularly lined up with economic releases or corporate earnings reports (The next one, for example, comes at the end of this month.) Moreover, the economists found that volatility in the federal-funds futures market, where investors bet on the course of the Fed's overnight target rate, follow the same pattern.
Neither reports from the Fed nor speeches and testimony from Fed officials follow the pattern. But since 2001, the Fed's Board of Governors discount-rate meetings have tended to fall into the biweekly cycle.
So one scenario goes like this: Board members tend to gather on even weeks after the Fed's rate-setting meeting to talk things over. The content of those discussions makes its way into financial markets, maybe through news reports, maybe through people in business, finance or academia that the Fed talks to, maybe through some combination of sources. As a result, investors have greater certainty on the direction of policy, and stocks rise.
There's that. There is also the possibility of merely matching a particular pattern with an FOMC meeting variable, in other words, attempting to fit correlation as causation.
Still, as readers are aware, and as first Zero Hedge showed, and then even the US Treasury confirmed, buying stocks on large POMO days, or simply during the duration of POMO between 10:15 am and 11:00 am during the day, has also generated massive market outperformance.
So are these merely self-fulfilling prophecies, where people jump on the pattern thus validating it, involving either the FOMC meeting or the daily bond buybacks by the Fed, or is there something more sinister here? Perhaps the answer will only emerge after this "pattern" information is fully public knowledge and when everyone, not just a select group of traders, are privy to the pattern and trade around it.
Usually, it is those kinds of mass knowledge events that make such pattern trading null and void.
Or at least, they used to. After all, we are now in the New centrally-planned normal, when the Fed has made the market so simple by design an idiot caveman can generate a 30% each year: with every other "wealth creation" instrument failing, the S&P 500 is the only thing the Fed has left.
Which is why it wouldn't surprise us if, counterintuitively, as everyone piled into the "Even" trade, its outsized return became even more pronounced. At least until such time, as the Fed, with its relentless, self-destructive and ultimately futile micromanagement of everything, finally loses control. Then patterns, charts and indeed markets, will be the last thing on anyone's mind.
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