Watch Out: 7 Market Anomalies You Should Know

The following tradable anomalies are noteworthy. However, investors should remember that all anomalies can come and go unexpectedly. This does not mean that you should develop a strategy based on them. However, those smart investors who pay attention to these seven moments can reap the benefit.

Small firms outperform the bigger ones

Companies with smaller caps tend to outperform more prominent players. If we talk about an anomaly, the company’s growth is a trigger for the growth of its stock. You will agree, small companies have much more room for expansion.

For a tech giant like Microsoft to rise in value by even 10%, its sales must increase by at least $10 billion. At the same time, an additional $70 million in sales may be enough for a similar increase in the value of its shares.

The January effect

Quite a common anomaly. The bottom line is that stocks showing low performance in the fourth quarter of last year can hit records in January. This effect can hardly even be called an anomaly. At the end of the year, investors tend to get rid of ineffective stocks. It’s already a golden rule.

On the other hand, investors are postponing buying efficient stocks until January. Their caution is explained by tax-paying and earnings season.

Low book value

As a rule, stocks of companies with a price-to-book value ratio below average outperform the market. According to numerous studies, buying stocks with a low price/book value ratio is more effective.

Cheap stocks grab the attention of investors and thus return to the average. Weak, but still an anomaly.

Low liquidity stocks

This anomaly can also be called “long-forgotten firms.” We are talking about low liquid stocks or with a lower trading volume. The shares of such companies, as a rule, are not supported by analysts. The anomaly is that as soon as investors get back to these companies, the value of shares rises rapidly.

Trend reversals

According to some reports, stocks change direction during a specific time (usually a year): yesterday’s best performers become the worst ones and vice versa. Logically, overpriced stocks will sooner or later fall in value.

This anomaly also takes place because investors expect these reversals to work. When many investors sell last year’s winners and buy last year’s losers, stocks move in the predicted direction.

Days of the week

Researches show that stock fluctuations are most often seen on Friday, not Monday. On Fridays, there are also more positive dynamics in the market.

Perhaps psychological factors matter. Most likely, in anticipation of the weekend, market participants are more optimistic at the end of the week.

Dogs of the Dow

The essence of the anomaly is that investors could beat the market by preferring companies included in the Dow Jones Industrial Average.