| Term Of The Day | INVESTOPEDIA January Effect The January Effect Is A Seasonal Increase In Stock Prices During The Month Of January. Analysts Generally Attribute This Rally To An Increase In Buying, Which Follows The Drop In Price That Typically Happens

1st Jan '19 by skinner66

10 comments 1640 reads

Term of the Day | INVESTOPEDIA

January Effect
The January effect is a seasonal increase in stock prices during the month of January. Analysts generally attribute this rally to an increase in buying, which follows the drop in price that typically happens in December when investors, engaging in tax-loss harvesting to offset realized capital gains, prompt a sell-off. Another possible explanation is that investors use year-end cash bonuses to purchase investments the following month. any thoughts on this ?

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Skinner66

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10 comments

timarr

1st Jan '19

End of the UK tax year is April, hard to see how that would effect trading in January.

timarr

Brilliant Leader

1st Jan '19

Indeed timarr. If such an effect does exist in the U.K. it is more likely to be caused by year-end trading updates combined with a bit of new year optimism.

Gromley

1st Jan '19

Funnily enough this is quite a close parallel to a piece of research I have been doing (to be completed in the next few days).

My initial view is that the hypothesis, that I think from the Original Post is being attributed to Investopedia, is entirely bogus.

From what I see of the date January is one of the worst moths in the year for the market.

It is flattered by a substantial up-tick in Jan-1989; if you treat that data point as an outlier - then January loos a pretty poor month for investors.

Taff6

1st Jan '19

The January Effect: Still There after All These Years, Robert A. Haugen and Philippe Jorion
Financial Analysts Journal, January/February 1996, Vol. 52, No. 1:27-31.

The year-end disturbance in the prices of small stocks that has come to be known as the January effect is arguably the most celebrated of the many stock market anomalies discovered during the past two decades. If this anomaly is exploitable and if the stock market is reasonably efficient, one would expect that opportunity would have been priced away by now. Evidence indicates, however, that the January effect is still going strong 17 years after its discovery. The magnitude of the effect has not changed significantly, and no significant trend portends its eventual disappearance. Because the anomaly can be inexpensively exploited, its persistence has implications for the theory of efficient markets and for the persistence of anomalies in general.

The January Effect, Mark Haug and Mark Hirschey
Financial Analysts Journal, September/October 2006, Vol. 62, No. 5:78-88.

Analysis of broad samples of value-weighted and equal-weighted returns of U.S. equities documents that abnormally high rates of return on small-capitalization stocks continue to be observed during the month of January. This January effect in small-cap stock returns is remarkably consistent over time and does not appear to have been affected by passage of the Tax Reform Act of 1986. This finding brings new perspective to the tax-loss selling hypothesis and suggests that behavioral explanations are relevant to the January effect. After a generation of intensive study, the January effect continues to present a serious challenge to the efficient market hypothesis.

These text date back over 10 years not sure if more recent research is available, however I am aware that other research suggest that this may be somewhat of a a global phenomena with many countries following similar patterns. However I've nor heard of UK markets being attributed to it or referenced by the January effect. Nevertheless the UK does tend to follow the US closely.

Hose builders have been reported to considerably out perform the markets in the first quarter in the UK though, not forgetting that Santa failed to visit this year and the US mid term election gain also failed to materialise

Happy New Year and best wishes for 2019 to one and all

jonesj

2nd Jan '19

I have been reading "Poor Charlie's Alamnac" on the beach in the last few days.

Whilst long being a fan of Mr Munger, I only recently dug down to the third page on a Google search to find a pdf of this.

The "Quickly eliminate what not to do" idea seems relevant here.

Any January effect is likely to be so small that it would be obliterated by dealing costs.

Also, whilst I think efficient market theory has it's limitations, the markets are likely to be efficient enough to make a January effect very small. There will be large inefficiencies to exploit elsewhere, typically more difficult to find and most definitely not inefficiencies that the journalists write about every January.

The January effect is unlikely to be my way of catching up with George Soros.

timarr

2nd Jan '19

I did look at this years ago: http://www.psyfitec.com/2009/1...

Broadly there's little evidence of any January specific effect over and above the Halloween Effect. The latter is so persistent that it's hard to believe that there isn't something causal behind it.

However, without knowing exactly what's causing it we can't say whether it's a behavioural effect and therefore subject to change due to changes in underlying conditions - e.g. changes in tax years - or it's something more robust such as a physiological response to the weather. A rough rule of thumb is that if you're attempting to exploit an effect that has an unknown cause - such as the mid-term effect which has just failed for the first time in 70 years - you should assume it could fail at any time and position accordingly.

For those really interested in the effect of spurious correlations then I'd recommend David Leinweber's Stupid Data Miner Tricks which gives to lie of most of the post-hoc analysis done these days. He showed, for instance, that Bangladeshi butter production was, for a while, the best predictor of movements in the S&P 500:

If you look at 100 regressions that are significant at a level of 95%, five of them are there just by chance.

In a world full of data everything is correlated with something, but just because someone has a plausible sounding explanation it doesn't make it true. As Leinweber says:

If it seems too good to be true, it is.

timarr

Aislabie

2nd Jan '19

Whether or not the market reflects it there would seem to be a good reason to expect some temporary effect from the release of new yearly budgets which still operate in many areas.
Many US organizations work to a 31 Dec year end so that purchases that could not make it into the previous budget find a sympathetic hearing in January.
In the Uk there are undoubted year end effects for local authority spending around the end of March. But as with the US the effects of “using up unspent budgets” may be offset by “released in the new year budget”.
So perhaps this effect - if there is one at all - is more to do with whether the new year budgets are larger or smaller than previous years

Howard Marx

2nd Jan '19

The S&P-500 returns by calendar month since 1950 are:

5c2c8425ea771monthly_spx_returns_1950_to

US investors commonly describe

November to April as the 'Best Six Months' &
May to October as the 'Worst Six Months'.

Since 1950, almost all of the S&P-500 returns have cumulatively been achieved in the 'Best Six Months':

Blissgull

2nd Jan '19

Analysts generally attribute this rally to an increase in buying, which follows the drop in price that typically happens in December when investors, engaging in tax-loss harvesting to offset realized capital gains, prompt a sell-off.

But there is not usually a December sell off. December is seasonally the strongest month of the year.

andrewdb

2nd Jan '19

I looked into this (FTSE100 index) and found the same - no strong +/- effects
... however did find a weak -ve for the first few days in jan.
Never tried that in real life though.

Would suggest that statistical relationships are always predicated on "all things being equal" and this year definitely will not be, so the relationships you consider largely reliable
- buy Oct / Sell May
- buy when index is above 10 month MA
- buy defensives
- buy momentum
- dont buy when lots of overseas people buy us stocks

- add your own

will not help this year.

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Term of the Day | INVESTOPEDIA January Effect The January effect is a seasonal increase in stock prices during the month of January. Analysts generally attribute this rally to an increase in buying, which follows the drop in price that typically happens

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Skinner66

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