These effects may work best as an addition to a fundamental analyst. And with potential assets with a lot of speculating, it may be the only thing you can look at.
All of these theories could just be random, and the evidence supporting them is small. The reasons behind these phenomena may be a combination of factors or something else that we have not yet understood.
These effects are not guaranteed to occur every time and have not occurred consistently in the past.
They may also be found and used, but once the market adapts, the advantage is no longer present.
They have also not been tested in every market, so it may not hold true outside of the US.
The Weekend Effect or Monday Effect
Prices on Mondays tend to be lower than those on the close time on Fridays.
It is possible that the weekend effect is due to the release of bad news after the market closes on Fridays, which prevents people from being able to panic sell.
Other factors that may contribute to the weekend effect include people feeling depressed about returning to work, rebalancing portfolios at the beginning of the week, options expiration dates, and the sale of treasuries on Mondays, among others
The Turn-Of-The-Month Effect or TOM Effect
On the last days of the month and the next month, the first day's stocks tend to increase.
This may be due to window dressing or physical factors such as the start of a new month. For example, a New Year's resolution or the preference to begin a new month without any red.
Santa rally or Christmas rally
Stock prices tend to rise the last week of December and the two first days of January. And is more likely to happen during bull markets than bear markets.
It could be caused by people returning from the holidays feeling happy and satisfied, leading to increased buying activity. Some investors may also be buying stocks as gifts for themselves or others. Additionally, the influx of bonuses from jobs may be causing more money to flow into the market. Finally, institutional investors may be trying to improve their end-of-year performance by buying stocks, this is called window dressing.
Stock prices tend to rise during the month of January, with small-cap stocks being more likely to experience the January effect according to some studies.
This can be due to tax-loss selling and which means selling stocks at a loss to reduce taxes.
This can be due to people buying back after they had done tax-loss selling at the end of the year. Santa rally, windows dressing, new year bonuses, and optimism because of a new year are all some factors that can be a part of this.
The Size Effect
Small stocks tend on average to outperform large stocks. The risks are higher but they tend to outperform on average.
Smaller companies often have the potential to grow more, as they have more room to expand compared to larger companies, which may have already reached a mature stage of growth.
However, the larger the company, the smaller the percentage of growth it may be able to achieve.
Smaller companies are often less well-known, which can lead to them being overlooked or undervalued. Additionally, they may have a worse track record than large-cap stocks, making it harder to accurately value them.
While there are some potential benefits to investing in small-cap stocks, it is important to note that they can also be prone to be overvalued as easily as they can be undervalued.
The Small Firm Effect or Small-Cap Premium
The small-cap tends to outperform larger companies on a per unit-of-risk basis. Meaning you get more paid for the amount of risk you take.
This is related to the size effect, so they share many of the same underlying reasons.
The Value Effect
This states that companies based on value investing outperform growth companies over the long run.
They tend to be less volatile and more boring than growth companies. They are also easier to predict because they often have tangible assets.
Growth stocks, on the other hand, are often valued based on their expected future revenue growth. However, predicting the performance of growth stocks is more speculative than investing in them. Due to no one can actually successfully predict the future.
One other theory is that investors overreact to the growth of growth companies.
The Momentum Effect or Momentum Investing
Stocks that have been going up or down for a while will likely keep going in that direction. In the short term that is.
Herd mentality is probably one reason for it. People tend to think an investment that has gone up is more likely to keep going up and that could be true in the short term, and vice versa.
The Low Volatility Effect or The Beta Anomaly
Lower-volatility stocks tend to perform better than stocks with higher volatility.
People tend to overreact to news and that may make an asset over or undervalued. Assets that are not traded that much are more likely undervalued.
They are forgotten and boring and that may provide higher returns for investors that want to take the time to research them.
The Earnings Surprise Anomaly or Earnings Announcement Anomaly
Companies that get much bigger earnings than analysts have predicted tend to perform better.
People tend to think they are underestimating companies if they have more earnings and hence should buy more.
The Liquidity Effect
Companies with higher liquidity tend to perform better than those with lower liquidity.
This is because companies that are easier to trade or have assets that can be sold quickly are more likely to perform well.
The market seems to like liquid assets or that companies that have less liquid assets are often more overvalued.
The Illiquidity Effect
Companies with lower liquidity tend to perform worse than those with higher liquidity. This is the opposite of the liquidity effect.
The Insider Trading Effect
If insiders buy and sometimes sell their own stock it can move the prices.
The idea behind this is that someone within the company should know more about the company and hence if that person invests a somewhat significant amount it should mean they believe the company.
However the insider trading effect may even be true for smaller amounts, so any purchase can move up the price. This can be used by people within the company to try and pump up the price.
It's illegal but companies priority is always to make the most money for its shareholders.
The Yield Curve Effect
If you are getting paid less for a longer bond maturity, it is a sign of a higher risk for a weak economy.
Typically, people want to be paid more for longer bonds, so if the situation is inverted, with shorter bonds paying more, it can be a bad signal.
This is considered a leading indicator of a recession. Learn about more recession indicators here.
The Emerging Markets Effect
Companies in emerging markets tend to outperform in the long run.
These countries often have a bigger risk associated with them, not only due to the health of the companies but also due to political risks and corruption.
For example, a dictator could theoretically take over a company or boycott it. Corruption can deteriorate important things.
Just look at the Russian military, they have been seen wearing display helmets to war. Corruption is only good for someone in the short term.
The Home Bias Effect
People tend to invest only or the vast majority in their home country. Even if there are more attractive investments in other countries.
This can be due to people being more comfortable investing in their home country. Scared of foreign taxes, more comfortable in local currency, or any other reasons.
This can be a problem if your country is getting overvalued or the assets you have expertise in are. Then looking else way may be good.
Investing in another country adds diversification and not only in the sense of owning an asset in more countries.
But if there is another currency then you are getting additional diversification to protect your capital, especially if you get some kind of dividend.
The Disposition Effect
People tend to hold into losers too long, even if something valid has happened.
The sunk cost fallacy is one of the reasons for this since people by nature have a psychological tendency to keep an investment if they have spent resources on it even if it's not worth it anymore and can even keep losing even more.
People very often do overestimate assets that have gone up. If an investment has gone up 20% every year these past years people will more likely think it will continue.
The Accruals Effect
Companies with more accruals are more likely to underperform.
Accruals are accounting metrics such as depreciation, reserves, and amortization. And also is payments that have not yet been received so in other words estimated future incomes.
Estimates are always more speculative since they are always room for error whenever someone tries to predict the future.
The Book-To-Market Effect
Companies with a low book-to-market ratio (ratio of market value to book value) tend to have higher returns than those with a higher ratio, this is often considered to be an indicator of a value stock.
You take the book value of the company and divide it by the market capitalization to calculate the book-to-market ratio. This ratio can be used as an indicator of a stock's value, as companies with a low book-to-market ratio (BTM) are thought to be undervalued.
But it's important to note that many companies can have a low book value but still be poor investment options.
The Cross-Sectional Dispersion Effect
Stocks with higher volatility (or dispersion) in their prices tend to outperform on average.
These companies tend to be riskier, but, in turn, should on average provide a greater return.