Strategies on how to predict the stock market abound. Algorithms, theories and effects fill books, magazines and newspapers. Some methods are new, some are old, but they are ever evolving—and investors are ever hopeful of their success. Here’s an example of each.
Now: High tech computer programs use algorithms—a problem solving technique that involves a logical sequence of steps—to predict future market trends. As with all technology, these programs are constantly being revised and improved. Do they work?
If data input is up-to-date and correctly transcribed, the results show some accuracy. But complexity and the amount of time involved setting up the programs are drawbacks. In addition, you still need to know when to ignore the output and think on your own.
Then: The Dow Theory is the basis for many of the technical analysis terms Wall Street uses today. Technical analysis looks for recurring patterns in the upward/downward trends and cycles of the stock market. Investors use this information to try to time the market; that is, sell before the bear settles in and buy before the bull starts to run.
Is technical analysis effective? Believers say yes, but others suggest it lacks merit because “fundamental” aspects of movements in stock prices, such as research into financial reports and past performance, are ignored.
Then again: A popular theory among investors is the January Effect. First noted in the early 1900s and reintroduced several times since, this concept holds that stocks with low market capitalization (small cap stocks) tend to achieve most of their pricing gains in January.
Reasons for this theory range from tax planning to the good feelings left over from Christmas. While there is no consensus on what causes the market’s movements at any time of the year (January included), the January Effect is a perennial favorite with a researched history.
Always: Stock market lore is interesting, sometimes partially correct and bound to have passionate proponents. But no algorithm, theory or effect is 100% accurate. There is only one constant investing caveat: buyer beware and take care.