What Is the January Effect?

The January effect is a common phenomenon in analyzing stock market trends from a statistical perspective, meaning that the rate of return in January is often a "positive number." The country that first exhibited the January effect was the United States, and then scholars from other countries have also discovered that the January effect exists in other stock markets.

January effect

Regarding the emergence of the January effect, scholars believe that this is related to the "

Although the "January Effect" is perhaps the most well-known of all seasonal stock market patterns, it is still often misunderstood.

For example, many investors believe that the January effect refers to the abnormal strength of the stock market as a whole in the first month of each year, but this is not the case. Research on this phenomenon shows that at this time of the year, an unusual seasonal pattern appears only: small stocks tend to outperform large stocks.

Therefore, the January effect does not refer to the broad market, but rather to the relative strength of small stocks.

Also, for small-cap stocks, the actual start time of their relative strength was mid-December last year, and basically ended by mid-January that year.

Perhaps because the January effect is so misread, it makes it as effective as ever. Often, a strategy to outperform the market will fail as the number of investors trying to profit from it increases.

The strategy is to buy a futures contract with the value line number before closing on December 20, and short the S & P 500 index futures contract closest to the time. This strategy should be liquidated before the close on January 9 of the following year. (If the market is closed on December 20, then this strategy requires the initial transaction to be closed before the next trading day; if the market is closed on January 9 of the following year, then it is required to close the position and close the transaction before the market closes on that day.

The results show that in the 23 years since KCBT launched the value line index, with the exception of two years, the strategy has been profitable in other years. Of course, at the time it seemed that this might mean that the profitability of the KCBT strategy began to weaken.

It is worth noting that when KCBT introduced this strategy many years ago, the value of a value line index futures contract was 500 times the value of the value line index; today, the price of a value line index futures contract is the value of the value line index. 100 times. Therefore, when this strategy is implemented today, for every S & P 500 index futures contract that is shorted, 5 value line index futures contracts must be bought at the same time.

It should also be noted that KCBT's strategy is not directed at the broad market. Even when the overall stock market declines between December 20 and January 9, it can still make a profit as long as large stocks fall more than small ones.

As a tracker of investment newsletter performance, I am pleased with the continued success of this strategy. As early as the late 1970s and early 1980s, several editors of investment newsletters recognized the January effect and used it to make a profit, which was almost earlier than all Wall Street analysts. Of course, few investors today don't know about this seasonal phenomenon.

This shows that, although the investment communications industry is famous for their editors' crazy self-promotion, they do sometimes find investment strategies with lasting value.