what is an anomaly 
in economics and finance an anomaly is when the actual result under a given set of assumptions is different from the expected result predicted by a model an anomaly provides evidence that a given assumption or model does not hold up in practice the model can either be a relatively new or older model understanding anomaliesin finance two common types of anomalies are market anomalies and pricing anomalies market anomalies are distortions in returns that contradict the efficient market hypothesis emh pricing anomalies are when something for example a stock is priced differently than how a model predicts it will be priced 1common market anomalies include the small cap effect and the january effect the small cap effect refers to the small company effect where smaller companies tend to outperform larger ones over time 2 the january effect refers to the tendency of stocks to return much more in the month of january than in others 3anomalies also often occur with respect to asset pricing models in particular the capital asset pricing model capm although the capm was derived by using innovative assumptions and theories it often does a poor job of predicting stock returns the numerous market anomalies that were observed after the formation of the capm helped form the basis for those wishing to disprove the model although the model may not hold up in empirical and practical tests it still does hold some utility 4anomalies tend to be few and far between in fact once anomalies become publicly known they tend to quickly disappear as arbitragers seek out and eliminate any such opportunity from occurring again 1types of market anomaliesin financial markets any opportunity to earn excess profits undermines the assumptions of market efficiency which states that prices already reflect all relevant information and so cannot be arbitraged the january effect is a rather well known anomaly according to the january effect stocks that underperformed in the fourth quarter of the prior year tend to outperform the markets in january the reason for the january effect is so logical that it is almost hard to call it an anomaly investors will often look to jettison underperforming stocks late in the year so that they can use their losses to offset capital gains taxes or to take the small deduction that the irs allows if there is a net capital loss for the year many people call this event tax loss harvesting as selling pressure is sometimes independent of the company s actual fundamentals or valuation this tax selling can push these stocks to levels where they become attractive to buyers in january likewise investors will often avoid buying underperforming stocks in the fourth quarter and wait until january to avoid getting caught up in the tax loss selling as a result there is excess selling pressure before january and excess buying pressure after jan 1 leading to this effect 3the september effect refers to historically weak stock market returns for the month of september there is a statistical case for the september effect depending on the period analyzed but much of the theory is anecdotal it is generally believed that investors return from summer vacation in september ready to lock in gains as well as tax losses before the end of the year 5there is also a belief that individual investors liquidate stocks going into september to offset schooling costs for children as with many other calendar effects the september effect is considered a historical quirk in the data rather than an effect with any causal relationship efficient market supporters hate the days of the week anomaly because it not only appears to be true but it also makes no sense research has shown that stocks tend to move more on fridays than mondays and that there is a bias toward positive market performance on fridays it is not a huge discrepancy but it is a persistent one the monday effect is a theory which states that returns on the stock market on mondays will follow the prevailing trend from the previous friday therefore if the market was up on friday it should continue through the weekend and come monday resume its rise the monday effect is also known as the weekend effect 6on a fundamental level there is no particular reason that this should be true some psychological factors could be at work perhaps an end of week optimism permeates the market as traders and investors look forward to the weekend alternatively perhaps the weekend gives investors a chance to catch up on their reading stew and fret about the market and develop pessimism going into monday aside from calendar anomalies there are some non market signals that some people believe will accurately indicate the direction of the market here is a short list of superstitious market indicators 