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Resource Investor: The Silver Institute vs. the Silver Users Association
How Hedge Funds Move the Markets
By John Crudele
New York Post
Thursday, November 10, 2005
http://www.nypost.com/business/31037.htm
Hedge funds are causing the stock market to be predictably good at
the very end and the very beginning of months.
You've been reading a lot about this phenomenon in this column.
But until I got Rabo Securities to actually do the research, my
sources and I weren't quite sure if we were getting a false
impression of this sort of market goosing.
But it's no myth. Professional traders are jamming the market higher
to make their results seem better.
And the blame seems to fall on hedge funds, which usually have to
report back to customers at least on a monthly basis.
Over the past decade, for instance, the Standard & Poor's 500 index
has been up an average of 0.72 percent over the four-day span that
includes the last two trading days of one month and the first two of
the next.
And that performance is considerably better than the 0.56 percent
average gain in those same four days if you extend the time frame to
the last 25 years -- before hedge funds existed.
No matter whether you use the last 10 years or the last 25 years, the
four-day average gain of 0.72 percent handily beats all other four-
day periods.
Since 1995 the average gain for all other four-day periods is only
0.27 percent and it's only 0.25 percent over the last 25 years.
These are averages. So that doesn't mean there is never a four-day
run of losses.
The numbers I mentioned above, Rabo's Michael Panzner says, are what
you get when all the winning and losing periods are averaged
together.
But the jamming technique of traders isn't as pronounced over the
last four days of a single month (like I thought it would be) as it
is when the four-day time frame overlaps two months.
Since some traders need three days in which to clear a trade, we
hypothesized that we'd see the anomaly beginning on the fourth day
before month's end.
However, over the last 10 years, the average gains over the last four
days of a month are 0.27 percent, the same as all four-day trading
periods.
Over the past 25 years, the gains in the final four days of a month
are 0.39 percent -- not significantly better than the average 0.25
percent gains recorded over the last 25 years.
And the gains during just the last two trading days of a month aren't
so great either.
You need the first two days of the next month -- when professional
traders reposition their holdings -- in order to make the killing.
During the past decade, the last two days of the month recorded
average gains of 0.18 percent compared with gains of 0.13 percent for
all two-day trading periods.
Taken back over the last quarter century, the S&P index rose 0.22
percent during the last two days of the month compared with just 0.10
percent for all two-day trading spans.
"The calendar seems to have taken on a significance in the modern
market," says Panzner, who is head of sales trading at his firm.
Take this October as an example. The S&P rose a startling 3.04
percent during the last two days of October and the first two of
November. But the gains were heavily weighted -- 2.38 percent -- to
the last days of October.
And then the commentators can't figure out why the upward trend
doesn't continue when professional money managers are finished
doctoring their results to impress customers.
The pundits credited this October's rally to a lot of things -- good
corporate profits, declining energy prices, the pick of a Federal
Reserve chairman nominee.
But why, then, hasn't the market continued to rally strongly?
Corporate profits aren't much different today than a week ago. And,
if anything, energy prices are lower today that on Oct. 31.
The difference? Hedge fund operators -- who suffered a horrible month
in October -- are no longer in a last-ditch effort to bail out their
results.
So all the good news that the pundits were finding just isn't good
enough for the market on an average day in November, when hedge fund
managers aren't cooperating.
But investors should be encouraged by this sort of trend.
What happened at the end of October means that professional money
managers can still muscle the stock market higher.
And you can be certain they will try to do that again by the time
their results get reported to customers at the end of this year. I'm
guessing it'll be a vigorous rally in the middle of December.
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