Market anomalies are something that shouldn\u2019t be, but still are. An unexplained phenomena. An occurrence with no story to back it up. A glitch in the matrix. In the stock market, they show up in countless ways: sudden dips and jumps, patterns that stick around impossibly long, companies that defy the odds year after year. They\u2019re popular with traders because, since they can\u2019t be explained, anyone can try to explain them. There\u2019s an endless amount to be said about them. Anyone can sell their own snake oil, and many do. So, before you end up accidentally stocking up on snake oil, do yourself a favor and acquaint yourself with market anomalies. A Major Market Anomaly: Momentum This anomaly is so ingrained in our culture, it will hardly come as a surprise to anyone, trader or not: winners keep winning. The rich get richer. When it rains, it pours. This kind of common-sense knowledge shows up in the stock markets in countless ways. When traders talk about momentum \u2013 \u201cthis still has room to run\u201d, \u201cit\u2019s all downhill from here\u201d \u2013 they\u2019re falling prey to one of the most basic, almost childish assumptions: what\u2019s been happening will keep happening. That\u2019s all it is: monkey see, monkey do. But, as predictable as it is, this anomaly persists because stock prices are set by \u2013 you guessed it \u2013 monkeys traders. And, if enough traders join in, you end up with momentum, which can build and build until it suddenly, disastrously turns. What about fundamental market anomalies? Momentum is an example of a technical anomaly, rooted in patterns in market data. Fundamental anomalies are based in data that isn\u2019t in the charts, like the ratio of a company\u2019s stock price to revenue or total assets or other balance sheet figure. A few typical examples: - Small firms outperform big ones. There will always be \u201cevidence\u201d that small companies will produce better returns than big ones: penny stocks. Sometimes, they explode for 1000% returns in days \u2013 something that\u2019s inconceivable for the S&P 500. Sometimes, there are gains to be had, but over the long term, following small companies devolves into a game of sheer chance. - Low price to book value means opportunity. If a company has a low stock price, but relatively high book value (total assets minus total liabilities), some take that as a sign that the market is undervaluing its stock. But, in today\u2019s blitzscaling climate, a company\u2019s choice to take on debt (and thus lower its book price) may mean it\u2019s poised for quick growth. - Neglected stocks are bound to turn around. You know how sometimes you set expectations low so that you can blow someone away? This anomaly is what happens when traders apply that logic to the market. If a stock is popular and getting lots of attention, all those traders\u2019 high expectations are priced in, making it overpriced. Which means that unpopular stocks that no one cares about are bound to do better than expected \u2013 except this isn\u2019t often the case. Bad stocks can just be bad. It happens all the time. Fundamental anomalies might seem more sensible because they\u2019re grounded in actual facts about companies, but they\u2019re still based on ho-hum logic that can convince you of a pattern that isn\u2019t there. So, if they\u2019re not true, where do market anomalies come from? The stock market is not a barometer of how companies are doing, like hospital patient\u2019s vitals. It\u2019s a reflection of companies\u2019 past performance and future expectations as well as plenty of other loosely related variables, like how competitors are doing, how the sector is doing, geopolitics, who the new CEO is, and on and on. The stock market operates on a nebulous, unprovable assumption that all information is priced in: the efficient market hypothesis. If this hypothesis were true, then every stock\u2019s price would perfectly reflect 100% of the available information about it. Trading would be about as exciting as stamp collecting. And you\u2019d probably be reading a book instead of this. But, like age, a stock price is just a number. You can\u2019t pin an exact value to a stock, even for a moment, because time is part of a stock\u2019s value. The data in a given moment has priced in certain assumptions about the future and certain patterns from the past. The market takes in an entire world of information to make decisions about individual stocks, contracts and commodities, assigning it a value. Anomalies remind us that the rules that seem to govern the market are always being tested. When an anomaly comes around, it\u2019s not that the market is crazy. It\u2019s a sign that we, individually and collectively, haven\u2019t framed the market correctly. We\u2019re leaving something out, or assuming something. So, because we keep being human, market anomalies keep happening. That\u2019s just how random chance works. The billions of interactions every day on the market mean that just about anything will happen eventually \u2013\u00a0even the impossible. We have to constantly challenge our assumptions and admit when our judgment gets the best of us. Fortunately, machine learning can now help us see past our human nature. While traders have used the term \u201canomaly\u201d since around 1970, Fractalerts\u2019 market data goes back to 1930 \u2013 literally since before anomalies were anomalies. Optimize your trading with fractalerts! Want to learn more about how math and physics can improve your trading? 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