Weekend Charting and Chart, page-33

OK, here's a bit of chat.

There was a bit of argy-bargy this week about Moon Trading. I didn't catch the original post, but apparently somebody referred to it as "crap". PB jumped in to defend the practice noting the performance of the market on the New Moon.

First - let me announce my bias. I'm skeptical. I usually am of any practice where there isn't a clear relationship between the concept and what it is supposedly connected to.

Having got that out of the way - I'd just like to point out the following anomaly.

The original academic paper which drew attention to the concept was produced by Ilia Dichev and Troy Janes (August, 2001, “Lunar Cycle Effects in Stock Returns”) didn't actually use statistics based on a common methodology of Lunar Trading.

A common methodology has been expressed, for example, by Tom Pelc and Dmytro Bondar (Royal Bank of Scotland, 2010) as follows:

" … buy an index on the new moon (if this is a non-trading day, buy on the next trading day), hold till the full moon (usually 14-15 days), sell the index on the full moon(similarly, if non-trading day, sell on the next trading day), repeat the investment of the overall amount on the next moon cycle (usually in 14-16 days)."

Here are their results using this methodology on six different indices, FTSE 100, S&P 500, DAX, EUROXX 50, Hang Seng, CAC 40:



OK - fair enough.

Now check this for an anomaly. The following quote is from http://www.theidiotandthemoon.com/moontrading.html

"Basically, stock prices tend to be higher around the time of the New Moon each month and reach a temporary low point around the time of the Full Moon."

Note that is the opposite of the idea suggested by the RBS guys. It seems to suggest, buy on the Full Moon and sell on the New Moon. He says:

"What I discovered was that, statistically, the old assertions not only hold up, but when traded consistently over time, produce big profits for small amounts of time exposed to market conditions."

Idiot and the Moon then goes on to suggest some adjustments to the idea which result in much improved performance.

Two opposing ideas about Moon Phase trading that result in great results. How can this be?

Now getting back to Dichev and Janes. What did they investigate and find? Here it is:

Specifically, returns in the 15 days around new moon dates are about double the returns in the 15 days around full moon dates. This pattern of returns is pervasive; we find it for all major U.S. stock indexes over the last 100 years and for nearly all major stock indexes of 24 other countries over the last 30 years.


Nope - not Buying on the New Moon and Selling on the Full Moon. Nope - not Buying on the Full Moon and Selling the New Moon. Their results were based on 15 calendar days centered on the new moon date vs. the 15 calendar days centered on the full moon date.

Confused? hmmmmm.

Francis Bussiere who has a fascinating Chart List on Stock Charts.com (http://stockcharts.com/public/520756) provides this warning:

"Moon Cycles are statistical, trust when tracking well." and "New Moons are statistically highs but gives (sic) steep declines when inverting into a low."

If you weren't confused before - you should be by now.

Now - have a look at a study completed by CXO Advisory using a similar methodology suggested by Dichev and Janes, i.e., trading based on 11 days centred on the New Moon and 11 Days centred on the full moon.

Here's their results:



The results in the 2000's are not impressive. Of course, in that time we had two bear markets. But we also had an impressive bull market, and the start of another bull market.

So, if you think this performance provides profits, no matter what the market conditions - you might think again.

I might also point out that these profit results don't take into account transaction costs, slippage and taxes. These can be expensive. The returns on the Stock Indices don't include dividends reinvested - the magic of compounding - which I'd suggest just might put a buy-and-hold method way ahead of the moon trading method when adjusted for costs. (That's an assumption that needs complex testing - but makes intuitive sense to me.)

I like to go back to Bill Eckhardt who started Turtle Trades with Rich Dennis: it doesn't matter what stock picking method you use, you'll make money if you use good money management techniques. Even flipping a coin as a buy/sell method will net you good profits if you use good money management techniques.

The following interview with Bill Eckhardt is worth reading:

http://finmind.blogspot.com.au/2005/08/william-eckhardt-mathematician.html

Here's a little excerpt:

==== Having seen people who have survived as traders and those who haven't, what do you think are thecharacteristics that differentiate these two groups? ====
The people who survive avoid snowball scenarios in which bad trades cause them to become emotionallydestabilized and make more bad trades. They are also able to feel the pain of losing. If you don't feel me painof a loss, then you're in the same position as those unfortunate people who have no pain sensors. If theyleave their hand on a hot stove, it will bum off. There is no way to survive in this world without pain.Similarly, in the markets, if the losses don't hurt, your financial survival is tenuous.
I know of a few multimillionaires who started trading with inherited wealth. In each case, they lost it allbecause they didn't feel the pain when they were losing. In those formative first few years of trading, theyfelt they could afford to lose. You're much better off going into the market on a shoestring, feeling that youcan't afford to lose. I'd rather bet on somebody starting out with a few thousand dollars than on somebodywho came in with millions.

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