Top 7 Market Anomalies Investors Should Know
7 market anomalies that any investor should be aware of are:
Small firms mostly outperform
Firms with smaller capitalization are seen outperforming various larger companies can be termed as the first big anomaly. The growth of a company is what drives the stock performance and it is common sense that a smaller company has a long ladder to climb when compared to bigger companies. This means that they have more scope for stock price growth.
The January Effect
This one is better known than most other anomalies. The thought that can be correlated with this is that stocks which have not performed well in the fourth quarter of the year do outperform in the month of January. There is hard logic to back it up as well.
There is a full reversal in the trend of most stocks. This usually happens at the end of the performance spectrum which is mostly after a year and the big dogs become underdogs and vice-versa. Investment fundamentals also state that this anomaly has certain truth attached to it. The fact that everyone expects that they work is part of the reason why they actually do.
The days of the week
This anomaly is widely hated because it is impossible to make any sense out of while still being very true. There are numbers which prove that stocks move much more on a Friday than a Monday, which causes an obvious bias toward positive market on the said day. Although it isn’t a huge mole in the system, it is a strong one.
Low Book Value
There are stocks which have below average ratio of price to book and they outperform in the market. There have also been tests to confirm the fact that a collection of stocks which have lower price to book ratio do beat the market. Individual performance is not assured and a really big group of stocks performs like this making it a pretty weak anomaly.
Dogs of the Dow
This anomaly can simply be seen as the example of the dangerous nature of trading anomalies. It was said that the market could be beaten by selecting stocks which were in the Dow Jones Industrial Average. The two major ways in which this idea was adopted was by either selecting 5 stocks which had the lowest stock prices and then holding them for a year or the second was to select 10 stocks which were yielding more than any other in the Dow stocks.
This one is a distant cousin of the Small firm anomaly, because it is said that some neglected stocks are often seen to outperform broad market averages. The stocks which have minimal analyst support and have less liquidity tend to make use of the neglected firm effect. The basic idea why this anomaly is going to function is that such stocks and companies happen to be found or discovered by investors and thus, tend to outperform.