The January Effect Gets Earlier and Earlier


The "January effect" refers to the propensity for stocks to outperform in January and for small-caps to outperform large-caps in January. According to this theory, stocks tend to rise more in January than most other months and small-caps tend to rise even more. Chartists looking to test these theories can put our new seasonality tool to work. As mentioned by Chip in ChartWatchers on November 23rd, the new seasonality tool gives StockCharts users the power to measure seasonal tendencies for any symbol. Chartists can even measure "relative" seasonality and compare the performance of one asset against another.

Let's look at seasonal tendencies for the stock market first and then relative tendencies for small-caps. The first chart shows monthly seasonal tendencies for the S&P 500 over the last twenty years. Notice that April and December show the highest tendency to advance (75% and 74%, respectively). Second, notice that the average gain for April is 1.7% and the average gain for December is 1.6%. This study suggests that the "January effect" has moved up a month and December is the month to watch. Also notice that the market tends to rise in April, which is right before the bearish six month cycle begins in May (sell in May and go away).

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The second chart shows relative seasonality by comparing the performance of the Russell 2000 (small-caps) to the S&P 100 (large-caps). Notice anything special? December is by far the strongest month for small-caps because the Russell 2000 outperformed the S&P 100 seventy four percent of the time in December. Moreover, December outperformance averaged a whopping +2.4%, which is also the strongest month for outperformance, by far. This study does indeed suggest that the January effect is really in December and the chances are pretty good that small-caps will outperform large-caps this month. In fact, small-caps are already starting their run because the Russell 2000 is up 2.86% the last four weeks and the S&P 100 is up 1.86%.

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Arthur Hill
About the author: , CMT, is the Chief Technical Strategist at Focusing predominantly on US equities and ETFs, his systematic approach of identifying trend, finding signals within the trend, and setting key price levels has made him an esteemed market technician. Arthur has written articles for numerous financial publications including Barrons and Stocks & Commodities Magazine. In addition to his Chartered Market Technician (CMT) designation, he holds an MBA from the Cass Business School at City University in London. Learn More
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