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Blog : Penny Stocks and the Daylight Savings Time Anomaly
by John Whitefoot on March 6th, 2009
If the current economic meltdown has shown us anything, it’s that, despite evidence to the contrary, investors of every ilk do not act rationally and consider all available information when deciding on what stock to buy…or sell.
Since the autumn, in particular, stocks from every sector have had the rug pulled out from under them. It doesn’t matter if it’s an excellent penny stock or large cap stock; chances are…it’s trending downward.
Granted, this isn’t your average economic climate. At the same time…there never is an “average” economic climate. There is always some factor that explains the way investors act, react, behave, or misbehave. I know this because I live and breathe.
The foundations of economic and financial theory are based on the idea that we invest wisely…using sound judgment. Meaning…the greater the research, the greater our probability of success. However, researchers have uncovered a surprisingly large amount of evidence that suggests that this is frequently not the case.
For example, Peter L. Bernstein in Against the Gods states that his evidence “reveals repeated patterns of irrationality, inconsistency, and incompetence in the ways human beings arrive at decisions and choices when faced with uncertainty.”
On the best of days the stock market is a harried place – toss in an external factor or two and you can maybe see why investors act irrationally when faced with uncertainty. And there is a lot of uncertainty out there.
More specifically, a field known as “behavioral finance” attempts to better understand and explain how our emotions and cognitive errors influence our investing decisions. Many researchers believe that the study of psychology and other social sciences can shed considerable light on the efficiency of financial markets as well as explain many stock market anomalies, market bubbles, and crashes.
There are hundreds and hundreds of examples of irrational behavior and repeated errors in judgment documented in academic journals. Some even make sense; those that aren’t are at least entertaining.
Here is just a small list of behavioral finance topics that you may, or may not know, are affecting you on a regular basis: Conjunction Fallacy, Curse of Knowledge, Halloween, Holidays, Lunar, January Effect, Monday Effect, Solar, Weather, and Weekend Effect. The list is endless.
This weekend gives rise to an interesting behavioral finance theory that will be tested on Monday. The oft neglected Daylight Saving Anomaly (or the One Hour Jet Lag Theory as I like to call it) maintains that Daylight saving weekends are typically followed by large negative returns on financial market indices.
And, the authors (Kamstra, Kramer and Levi) argue that the effect could be a direct result of changes in sleep patterns. After all, sleep related errors cause accidents that cost the U.S. over $56 billion a year. So it’s not a stretch to think that penny stock investors and money managers operating on reduced sleep could make errors in investing judgment. I do it even after 8 hours of restful sleep.
The researchers found that The Daylight Savings Anomaly effect results in an average one-day loss of $31 billion on the NYSE, Amex and Nasdaq. The anomaly had the strongest effect in the United States, Canada and the U.K. Germany had the least significant results – but then again, daylight savings didn’t occur in Germany from 1950-79. Maybe it’s just due to a lack of data…
With all of the other factors hammering the markets right now, I’m not so sure the Daylight Savings Anomaly will deliver statistically relevant data come Monday night. I think the overarching lack of stability, optimism and confidence may have more of an impact on the markets next week than putting the clock ahead one hour.
With the Dow trading at it’s lowest since 1997 penny stock investors around the globe appeared to be giving up hope and girding for a prolonged recession. In fact, the Dow has lost almost one quarter of its value this year and more than half since its high in October 2007.
“Nobody wants to buy a market today that they think is going to be down 2 or 3% tomorrow,” said one chief market strategist.
And therein lays the current penny stock investing conundrum: To buy or not to buy. Ongoing instability in the markets and plunging housing prices means the markets probably haven’t bottomed yet. And despite the economic stimulus package, it will likely be months before there are concrete signs of positive change.
Are penny stocks — now appearing to sell at a red-tag-sale prices — at a safe entry point? While no one knows when the time to jump back in is, it’s best advised not to dump your penny stocks either. The damage is done for now.
If you are a penny stock investor sitting on the sidelines, now might be the best time to draw-up an imaginary penny stock wish list. And decide what your risk level is.
I’m certainly not going to be the one telling people when to get back into the markets. Over the last year I’m sure there are more than a few TV pundits and financial advisors who told their flocks that "now" is the perfect time to start buying back in. They’re also probably still receiving hate mail.