A lot of traders scoff at the idea of lunar cycles in the stock market. But I like that, because if too many people start using a given edge in the market it usually leads to its disappearance. When something gets used up to full “capacity” then it fades away. So, as long as enough traders discard lunar cycles as “astrology” without taking a closer look, so long it probably helps to keep our little lunar edge alive. So far this year, the Nasdaq has gained 533 points in our lunar green periods and it has lost 5 points in the lunar red periods. Not bad. More on this below, let’s first take a look at the S&P 500 (click image to enlarge):
The S&P has continued to grind up and is now bumping into overhead resistance near 2030. We are starting a new lunar green period, which normally favors further gains. But in this case it doesn’t really look like a favorable setup for going long, because all my indicators are into oversold territory. The Earl has already turned down, and the MoM resides in overoptimistic +8 spheres. The slower Earl2 is still climbing nicely, which keeps the door open for new highs.
Overall, it is a situation where I think the next few weeks are going to be sideways at best, with good odds that we will see a retest of the 2000 level and possibly even 1950. There is no reason to become overly bearish at this point, but the market probably needs to catch some breath.
The day to day movements of stock markets are commonly attributed to changes of mood in investors. But that begs the question: where do these mood changes come from? Is it merely a result of getting good or bad “news” about the economy, or is there more to it?
Quite a bit of research has been done in this field. Here are some topics that may interest traders:
1) Sunshine. Do you feel more upbeat on a bright sunny day? So do many other people/traders. There is a correlation between sunshine and stock market returns: Good Day Sunshine:Stock Returns and the Weather
2) Seasons. Do you suffer from seasonal affective disorder (SAD)? In some countries 10% or more of the population does. There is a correlation between the seasonal variation of the length of the day and stock returns, also known as the seasonal tendencies: Winter Blues and Time Variation in the Price of Risk
3) Geomagnetic storms. Geomagnetic disturbances seem to affect a portion of the population. Stock market returns are lower in the six days after a geomagnetic storm. See this Atlanta Fed working paper: Playing the Field: Geomagnetic Storms and the Stock Market
In all those cases a hormone called melatonin is involved. If we have lowered melatonin levels we feel depressed, and then we probably trade accordingly. This brings me to:
4) Lunar phases. Swiss researchers found new evidence suggesting that a portion of the population doesn’t sleep so well in the days around full moons. It also knocked down their melatonin levels. Bad Sleep: Blame the Moon That would be a good explanation for the weaker stock market returns in our lunar red periods, which end 3.5 days after full moon.
5) Days of the week. Stock returns are historically weaker on Mondays. Why? Are melatonin levels also down because some people had some shorter nights over the weekend? Or because some do not really look forward to another week of labor. The Day of the Week Effect
Our mood is clearly a complex animal, with many artificial and natural factors coming together to influence our emotional state. Some natural factors are affecting the entire world population at the same time, and appear to be partially responsible for the day to day moves in financial markets.