Lunatic Markets? Trading with the Moon (10/2002)
First, let me start with a very important distinction between universal and transient moon effects: universal means independent from context factors like market volatility, trend direction, trend strength etc., transient means effects varying with these external factors. In other words, some correlations detected today were no different 10 or 100 years ago while others evolve under certain circumstances, last for a while and then disappear again (because the market itself changes!).
Universal Lunar Effects
An excellent research paper on this subject has been published by the University of Michigan Business School: "Are Investors Moonstruck? Lunar Phases and Stock Market Returns" (http://webuser.bus.umich.edu/). The conclusions of the authors (p. 25) are
| This paper investigates the relation between lunar phases and stock returns for a sample of 48 countries. We find strong global evidence that stock returns are lower on days around a full moon than on days around a new moon. Constructing a lunar trading strategy, we find that the magnitude of this return difference is roughly 4.2 percent per annum. Since lunar phases are likely to be related to investor mood and are not related to economic activities, our findings are thus not consistent with traditional asset pricing theories that assume fully rational investors. The positive association we find between lunar phases and stock returns suggests that it may be valuable to go beyond a rational asset pricing framework to explore the psychological effects of investor behavior on stock returns. |
The charts below by Bill Meridian http://www.cyclesresearch.com/ based on Dow price data of 80 years and S&P 500 price data of 35 years illustrate the idealized curve (0% on the x-axis is the new moon, 25% the first moon quarter, 50% full moon, and 75% the third moon). The idealized stock market low is 2-3 days before the new moon and the high 3-5 afterwards; the time around new moon is the most bullish time period within the lunar cycle and the time around full moon the most bearish.
These effects are, without doubt, real and consistent, yet the effect size is only 0.25% which is very small; nevertheless a "moon strategy" beats buy-and-hold by 4% thus outperforming the expertise of 80-90% of all financial professionals.
Transient Lunar Effects (Lunatic Markets)
Transient lunar effects are mostly found in emotional markets because the moon is the symbol for the human emotions, and the more emotional the market the visible the influence of the moon becomes. That's why I prefer to call these markets "lunatic" which contains "luna", i.e. the moon. [The reference point for lunatic markets is primarily the new moon]
It's not surprising that during crashs (=maximum emotional intensity) the moon cycle is dominant. Chris Carolan's research (http://www.calendarresearch.com/) has proven that panic lows are usally approximately 55 hours before new moons.
I observed a similar phenomenon with the euro in 1999 and 2000 when all three major bottoms (against the USD) came in about two days before new moon (article available in German only). The weakness of the euro was almost exclusively caused by emotional factors and fundamentally not justified which is an indication of a lunatic market and the reason this pattern changed when the long-term trend of the euro switched from bearish to bullish on October 26, 2000. Since that date, the predictive power of the lunar cycle has been considerably lower and major bottoms are mostly found around full moon now (and major tops in the first moon quarter). Consequently, I expect this pattern will change again after the next long-term trend reversal of the euro in 2003.
Advice for Traders
- "moon-trading" is by no means a stand-alone approach
- The universal effects are normally too weak to assist traders.
- The transient effects are at times a very powerful tool but they are constantly changing and solid astrological knowledge is necessary to understand the underlying dyncamics and draw the correct conclusions.
book recommendation:
Ray Merriman, The Ultimate Book on STOCK MARKET TIMING - Vol. 4. Solar-Lunar Correlations to Short-Term Trading Cycles (link)