January Effect?

Discussion in 'Trading' started by Blueskies, Dec 30, 2011.

  1. Blueskies


    Does anyone actually buy it this year? I feel like January will be a bad month. I think fund managers have been chasing and will pull back on euro concerns. Unless the ECB keeps printing, I think January could turn ugly real soon.

    Also, I'm concerned that China will increasingly look bad in the first part of the year although they may bounce back in the second half when the effects of their easing set in.
  2. Mvector


    Remember January 2008? Keep that recent example in mind - go look at S&P chart of late 2007 into early 2008.
  3. What do you mean "buy it"? The January Effect simply means that performance in January seems to predictive for the rest of the year. We don't know what the January Effect is yet.

    Read this article, and then you can post about it once January is over.

  4. The "January Effect" is an overloaded term. It may refer to:

    A) the stock market performance in January predicts the performance for the entire year
    B) small cap stocks outperform large cap stocks in January

    Both premises are supported by historical evidence, although as we know, past performance does not guarantee future results. The original poster apparently refers to interpretation B, according to which, one should be long small cap stocks right now.

    One thing I'd note in regards to the premise A is that it's probably just a statistical artifact. Let's say that instead of January, we'd look at February, or March, or any other month. I bet you that there is a positive correlation between the performance in any given month and the performance for the entire year that includes this month. Think about it: if we have a +20% return in any month, the entire year will probably be positive, and if we had a -20% return in any month, the entire year will probably be negative. If so, the "January Effect" as postulated in A is not predictive at all in the sense that it does not give you an "edge" by buying or selling in February based on the January performance.