Researchers have found a correlation between the amount of sunshine in New York City and daily stock market returns. This daily-updated graph is a 3-day forecast of the level of sunshine in New York City and the major financial centers that affect U.S. markets: 12 cities in all, with a heavy weighting on Manhattan and the U.S. northeast.
There is still a debate in academic circles about whether sunshine really does correlate with market price movements. Hirshleifer and Shumway (2001) in "Good Day Sunshine: Stock Returns and the Weather" found that 18 of 26 national stock markets showed correlations with the amount of daily sunshine in the exchange's city. You can access the pre-publication paper here. Here are some relevant excerpts from their excellent paper:
Psychological evidence and casual intuition predict that sunny
weather is associated with upbeat mood. This paper examines
the relation between morning sunshine at a country’s leading stock
exchange and market index stock returns that day at 26 stock exchanges
internationally from 1982-97. Sunshine is strongly significantly
correlated with daily stock returns. After controlling for
sunshine, rain and snow are unrelated to returns. There were positive
net-of-transaction costs profits to be made from substantial
use of weather-based strategies, but the magnitude of the gains was
fairly modest.
More sunshine meant greater likelihood of upwards returns. The authors go on
The magnitude of the sunshine effect is substantial. For example, in New York City, the
annualized nominal market return on perfectly sunny days is approximately 24.8% per year
versus 8.7% per year on perfectly cloudy days. However, from a trader’s perspective, the
value of these return differentials depends on whether it is possible to diversify the risk of
a sunshine-based trading strategy. We find that for reasonable levels of transactions costs,
trading strategies based on the weather generate statistically significant but economically
fairly modest improvements in portfolio Sharpe ratios. The set of investors who could
potentially have exploited such strategies includes just about everyone: institutional traders
and wealthy individuals who are able to conveniently trade index futures; and small investors
who hold open-end mutual funds.
And for traders wondering if this is worthwhile
While the daily Sharpe ratio of the market portfolio is 0.164 in our sample,
with zero transactions costs, the sunshine-based trading strategy increases the daily
Sharpe ratio to 0.186. This translates into an average annualized return of 32.35 percent for
a portfolio that matches the risk of the market portfolio. This compares with an average
annualized return of 28.08 percent for the market portfolio. For the optimal sunshine-based
strategy that accounts for transactions costs of two basis points per portfolio adjustment,
the daily Sharpe ratio of is 0.177. Translated into annualized returns, the optimal sunshine
portfolio (again with trading costs of two basis points) on average earns 30.67 percent per
year. Thus, after accounting for realistic transactions costs, trading on the sunshine effect
produces statistically significant, somewhat modest but non-negligible improvements in
portfolio Sharpe ratios.
However, a 2002 paper by Goetzmann and Zhu "Rain or Shine: Where is the Weather Effect?" studied brokerage accounts of 79,995 investors from 1991 to 1996. They did not find that investors take more risk, pushing up prices, on sunny days. The authors did find that market makers place wider bid-ask spreads on cloudy days.
Use the above indicator at your own risk. I tend to find that signals over 100 are more bullish. Like most things, this indicator is worth what you pay for it. |
