Stocks Section

Interesting Stockmarket Questions - Good Money Making Potential - Part 2

November 2005

This is the second part (first part is here) in a series of quick and interesting questions relating to the UK stockmarket.

Q: In interest rate cutting cycles which stockmarket sectors have traditionally benefited?

• There have been six cycles of interest rate cuts over the last 18 years, starting in October 1987
• The FTSE index has risen on average 11% over the 12 months following the first interest rate cut with the best individual sector being banking with tremendous gains averaging 28% over the year
• Technology, steel, mining, construction and building materials have also performed well with each sector gaining an average of 23%
• The tobacco, pharmaceutical and utilities sectors all generally under performed the market during these interest rate cutting cycles

Q: Some market analysts state that there is no better sector to invest in than the house and building sector in the first quarter of the year, is this true?

• True, the house building sector has risen 22 times in the first quarter over the last 26 years with an average day in of just under 12%
• Contrast this with an average day in the FTSE index in the first quarter of just 4.3%
• Analysts point to simple reasons, the majority of house building companies report preliminary figures in February and March so giving the market plenty of news to feed on
• Springtime is also the start of the selling season and thus further news on the state of the housing market, and of course let's not forget that housing has been in the significant bull market over the last 25 years apart from a small blip in the late 80s and early 90s
• In 2005 the gain in this sector in the first quarter was 8.1%

Q: What is the S&P 500 dog effect, and can it be used to make money?

• It is a very simple strategy, find the 10 the worst performing shares over the previous year (1 Oct - 30 Sep) and then buy them on the first of October with are holding period of three months
• This trade has worked every year in the previous eight years producing an average quarterly gain of 26.6%
• If you had traded this strategy last year the return was an outstanding 34%
• Analysts suggest that this strategy works because the end of September is the end of the US tax year and therefore there is a lot of market activity especially with funds dumping underperforming shares
• Also the stock market and companies are cyclical so this is a factor to bear in mind as well

Q: Which is the best day of the year to buy the FT-SE 100?

• Number crunching 5,000 trading days since 1984 suggests that the 9th trading day in August is the one to go for
• Over the last 21 years it has risen on 17 occasions
• Why this is so could well be random but it is interesting nevertheless one day traders and binary bet traders should mark the day in their diary
• Note, it is not the ninth of August but rather a the ninth trading day of August (in 2006 this will be 11th August)

LearnMoney.co.uk Comment: This one to us is purely random

Q: Is there a dog effect with shares on the London market?

• Yes, but the time to buy it is in December and hold out for games in January
• This has not been tested on the FTSE 100 index but it has on the FTSE All Share index
• There are many reasons for why this happens, some suggest that the recovery occurs naturally because January is historically a strong month for share price performance, others suggest it has to do with oversold conditions (ie the share prices have been battered down too much)

Q: If the stock market falls for two or more years is this a good time to invest

• Yes, in 1929 to 1931 the market fell for three consecutive years and was followed by a strong rally
• The market also fell between 1937 and 1940 but with a serious war to fight no conclusions should result
• The market also fell between 1947 and 1949 and was again followed by a strong rally
• Recently the market fell in 2000, 2001 and 2002 followed by another strong rally, although at present we are nowhere near all-time high prices on the stock market

LearnMoney.co.uk comment: Although the facts are correct in our view you have to compare economic like with like and anything over 30 years ago is suspect because the world changes at a far quicker pace these days.

• Read Part 1 of this article

See Also

Investing In The Right Sectors Is 9X More important Than Picking a Fund Manager
Why Fund Supermarkets are good news for investors
Discount Fund Providers & Supermarkets
Fund Management Company websites