Historical Trends Point Way to Higher Returns

By Schwartz, David | The Independent (London, England), January 2, 1994 | Go to article overview
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Historical Trends Point Way to Higher Returns


Schwartz, David, The Independent (London, England)


MANY of last year's "surprise" price shifts were no surprise at all to stock market historians.

Studying historical price trends can be a profitable undertaking. A 1993 investment would have grown 17.6 per cent by year-end on a broad index such as the FT-SE 500. The same investment, if moved out of the market during historically poor months, would have grown by 19.1 per cent.

Historical analysis provides investors with probabilities of success or failure but no guarantees. Take January, traditionally one of the most profitable months, with the odds of making a profit even higher if prices rise in the run-up to January.

Despite the favourable odds, January 1993 prices dropped 0.84 per cent. A strong end-of-month rally triggered by hopes of a cut in interest rates reduced the size of the loss but could not eliminate it.

Commentators described share prices in February and March as "drifting within a trading range". In fact, they followed the historical norm. Rising prices in January's second half often tip off a February price rise. February saw prices rise by 1.91 per cent. The typical March profit is a tiny 0.67 per cent, around 23 points on today's FT-SE 100. The 1993 price rise of 0.62 per cent for the month was right on the nose.

April's trend fooled financial historians. It is generally profitable. Prices rose in 21 of the past 22 years. But in 1993 April prices fell by 1.65 per cent despite continued good domestic news and rate cuts by the Bundesbank.

Between 1991 and 1992, prices in May and June each rose 50 per cent of the time. Historical price-trend analysis provides investors with a profitable edge. If prices have risen by up to 25 per cent in the past 12 months, the odds favour a May increase. This May's prices followed the trend, rising by 0.59 per cent. We found no hidden historical tip to help June investors, so we stood aside as 50/50 odds were not to our liking.

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