Hamptons Effect

Hamptons Effect

What is the ‘Hamptons Effect’
The Hamptons Effect refers to a dip in trading prior to the Labor Day weekend followed by increased trading volume as traders and investors return from the long weekend. The term implies that many of the large scale traders on Wall Street spend the last days of summer in Hamptons, a traditional summer destination for the wealthy of New York City. The increased volume of the Hamptons Effect can be positive in the form of a rally as portfolio managers place trades to firm up overall returns going into the end of the year or it can be on the negative side if those same portfolio managers decide to take profits rather than opening or adding to positions. The Hamptons Effect is a calendar effect based on a combination of statistical analysis and anecdotal evidence.

BREAKING DOWN ‘Hamptons Effect’
The statistical case for the Hamptons Effect is stronger for some sectors compared to others. On a market-wide measure like the S&P 500, the Hamptons Effect is characterized by slightly higher volatility with a small positive effect depending on the time period used. That said, it is possible to drill down to the sector level and create the case for a certain stock profile being favored following the long weekend. For example, the case can be made that defensive stocks that are consistent performers like food and utilities are favored going into the end of the year, and thus benefit from the Hamptons Effect.

Trading Opportunities
As with any market effect, finding a pattern and reliably profiting from it are two different things. Analyzing a huge set of data will almost always reveal interesting trends and patterns as you shift the parameters. The Hamptons Effect can certainly be mined out of market data when you play with the time period and the types of stocks. The question is whether the effect is large enough to create a true performance advantage after fees, taxes, spreads, and so on. For an individual investor, the answer is often no when it comes to these market anomalies. The Hamptons Effect and other similar anomalies that can be mined in data are interesting tidbits, but their value as an investment strategy is very small for your average investor. Even if a market effect appears consistent, it can quickly break down as traders and institutional investors implement strategies to take advantage of the arbitrage opportunity.

 

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