What is the Calendar Effect?

The calendar effect refers to perceived indicators or trends that are based on some aspect of the calendar. Related to stock performance as well as general market performance, the basic idea behind a calendar effect is that there are certain times of the year when specific conditions can be depended on to develop. These steady trends are understood to be consistent and can be predicted with a high degree of accuracy.

There are a few rather well known examples of the calendar effect that many investors believe to be highly predictable. Perhaps the most popular of all calendar effect strategies is called the January effect. Essentially, this calendar effect indicates that small-cap stocks will begin to rise on the last day of December and will continue to do so through the fifth trading day in January.

Much of the merit to this calendar effect owes to the fact that there is typically a great deal of selling taking place at this time, as one final means of wrapping up the finances for the previous calendar year. The last round of selling helps to create tax losses that can be called upon when doing fourth quarter tax reports, helps investors to raise quick holiday and post holiday cash, and creates capital gains. Persons who are looking to snap up good deals join in the selling frenzy by purchasing the stocks during this small window of opportunity.

The Mark Twain effect is also another calendar effect that some investors swear by. Based loosely on a quote by author Mark Twain, the theory behind this calendar effect is that stock returns are lower during the month of October than any other thirty day period in the calendar year. While the historical support for this theory is somewhat spotty, supporters are quick to point out that the stock crashes of both 1929 and 1987 both occurred in the month of October.

A third example of the calendar effect is known as the Halloween indicator. This concept basically states that the stock market is significantly stronger from November to the following April. Following this perceived effect, investors will sell in May and then let their holdings ride until the following October, usually the end of the month. This particular calendar effect actually seems to have a fair amount of historical detail to support the theory. Many supporters of the Halloween indicator suggest that people taking vacations and holidays during the summer months can lead to market weakness.