By: Larry MacDonald
Does the January Effect exist? The CXO Advisory looks at the S&P Composite Stock Index from January 1871 to November 2008 and concludes in the affirmative, albeit with a caveat.
They found that January has the highest average return (1.5%) of all the months. It also has the lowest standard deviation (2.9%), which makes the outperformance even better on a risk-adjusted basis. However, CXO Advisory warns that the January uptick appears to be on a downtrend. Indeed, the current decade from 2001 to 2008 is the only decade that the January Effect has been negative.
But eyeballing their data, one could arrive at a more encouraging interpretation. The 1930s and 1970s saw noticeably above-average January gains of 2% and 3%, respectively. As the stock market in the current decade is turning out to be similarly volatile, perhaps the Januaries to come in 2009 and 2010 could see strong rallies after all.
The thesis could be that there is unusually heavy tax-loss selling during the down years in turbulent decades. They are then followed by unusually heavy buying to re-instate positions in the stocks sold for tax reasons. For more, see Big January Effect this year?
2 Responses to “ January Effect revisited ”
I would think that given the dramatic
fall in oil, natural gas and commodities, if the market was to rally in Jan 2009, the TSX could easily return 10% from today should resources and commodities recover from their lows. I am under water in my HOU and HNU positions, but am up on my BCE, BMO,CCI(Canaccord) and even took a speculative bet on AIG today, all long positions in advance of an anticipated rally.
John
By John Gan on Dec 31, 2008
John
Good luck to you. I’m still down on my BCE but it’s coming back nicely.
LM
By Larry MacDonald on Dec 31, 2008