Market Anomalies

Recurring patterns in financial markets that challenge market efficiency

Understanding market anomalies including calendar effects, size premiums, and behavioral patterns that create investment opportunities
Modified

September 7, 2025

Category: Analysis & Research
Difficulty: Advanced

Definition

Patterns in the stock market that happen again and again, suggesting markets aren’t perfectly efficient.

Why This Matters

If patterns exist, you might be able to make money from them. But be careful - many patterns disappear once everyone knows about them.

Common Patterns

January Effect - Small stocks do better in January - Probably due to tax selling in December

Monday Effect
- Stocks often drop on Mondays - Maybe because of weekend bad news

Holiday Effects - Stocks often rise before holidays - People in good mood, less selling

Month-End Effect - Stocks rise at end and beginning of months - Money flows from paychecks and pensions

Size Effect - Small company stocks beat large company stocks over long periods - But they’re more risky

Value Effect - Cheap stocks (low P/E ratios) beat expensive stocks over time - Value investing tries to exploit this

Momentum Effect - Stocks that go up keep going up (for a while) - Stocks that go down keep going down (for a while) - Eventually reverses

Important Warnings

Many Patterns Don’t Last - Once everyone knows about a pattern, it often stops working - Academic studies may find patterns that don’t exist in real trading - Transaction costs eat up small profits

Don’t Get Too Clever - Most individuals should focus on low-cost index funds - Trying to time these patterns usually backfires - Professional money managers struggle to exploit these consistently

Bottom Line

Market anomalies suggest markets aren’t perfectly efficient, but that doesn’t mean you can easily profit from them. Most patterns are too small or unreliable for individual investors to use profitably.

Further Reading

Classic Papers: - The Cross-Section of Expected Stock Returns - Fama & French (1992), Journal of Finance - Returns to Buying Winners and Selling Losers - Jegadeesh & Titman (1993), Journal of Finance

Market Efficiency Analysis: - Efficient Capital Markets: A Review of Theory and Empirical Work - Eugene Fama (1970), free access - Market Anomalies - NBER Working Paper, free PDF