Market moves and the lunatic fringe
Source: The Australian
MPLODING equities, exploding credit default swaps, soaring gold and slumping oil — if, at any time over the past 18 months, it seemed that markets were in the grip of lunacy, it may be because investors are, technically, lunatics.
The market mayhem since the global financial meltdown began in 2008 has provided fertile soil for proponents of a branch of investment theory which holds that market cycles move in phase with the Moon.
Now, backed with decades of data and behaviour that can no longer be explained by purely rational analysis, the lunar theory has slipped into the mainstream.
In a piece of research that involved 14 of its senior analysts from across five leading financial centres scrutinising data from 32 leading indices over several decades, Macquarie Securities has arrived at a startling discovery: the two days on either side of the new lunar month represent most of the positive returns on equity markets for the next four weeks.
“Using data since 1988 for a wide variety of indices,” the report concluded, “it is quite clear that a strong surge in returns can be seen leading into the turn of the (lunar) month.”
The analysts are quick to dismiss the idea that the theory applies only to markets in Asia — a part of the world where belief in the lunar theory, especially in Hong Kong and Japan, is better established.
“The effect is not just an Asian effect, it happens globally,” the Macquarie report said.
“Of the 32 markets we examined, all showed higher than average returns around the turn of the (lunar) month … and for many of the markets, the average return for the rest of the month was below, or close to, zero.”
Equity markets, it seems, act as a particularly sensitive barometer for the invisible impact of lunar cycles on human psychology — an influence that has been widely assumed for centuries, but never solidly proven by science.
Macquarie points to two academic studies, which found that returns around the new moon are nearly double that of the corresponding full moon phase.
Using MSCI index data from the same 32 equity bourses and tracking decades of data, the Macquarie report found that: “In many markets, a very clear increase in average returns can be seen leading into the lunar new month.”
The results, the analysis said, showed that without exception every market showed a very slight increase in the average return over the new moon period.
Other brokerage firms have latched on to parts of the lunar theory. Analysts at CLSA recently pointed out to clients that the recent near-collapse of the global credit and financial system was presaged by the lunar cycle.
As markets teetered on the brink of oblivion in 2008, the true panic began exactly on the 27th day of the seventh lunar cycle. Eerily, that same phase marked the height of panic during the great market crashes of 1857, 1907, 1929, 1987 and 1997.
The Macquarie report, which acknowledges that investors are unlikely to adapt their strategies to fit the new research, concludes that the relevance of the theory is “probably slightly more powerful than, say, betting that good value stocks outperform in the long run”.
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