Monday, January 5, 2009

The January Effect vs. the January Barometer

From MarketWatch:
Commentary: January's effect on small-cap outperformance may be muted
By Jeffrey A. Hirsch, Stock Trader's Almanac

Whether or not the "January Effect" materializes this year has several implications.
First, there is often confusion between our "January Barometer" indicator and the "January Effect."

Our January Barometer, which was devised by Stock Trader's Almanac founder Yale Hirsch in 1972 exists primarily because of the passage in 1933 of the 20th "Lame Duck" Amendment to the Constitution. This moved Inauguration Day from March 4 to Jan. 20 and changed the day newly elected senators and representatives take office.

Since 1934, new Congresses now convene the first week of January instead of December; 13 months after they were elected, or March when new presidents took office.
The movement of these two market influencing events into January created the January Barometer and since 1933 it has essentially been "As January goes, so goes the year." There have been only five major errors since 1950 for a 91.4% accuracy ratio, 74.1% including the 10 flat years....

...The small-cap advantage now really begins in mid-December. Over the years we showed in the Almanac how small caps beat large caps 40 out of 43 years from 1953 to 1995. Then the January Effect disappeared for a few years.
However, when we compared the Russell 1000 Index of large-cap stocks to the Russell 2000 Index of small-cap stocks, the "Effect" reappeared -- just a couple weeks earlier.

This is clearly evident on the one-year seasonal pattern of the Russell 2000/Russell 1000. Thirty years of daily data for the Russell 2000 are divided by the Russell 1000 and then compressed into a single year to show the one-year seasonal pattern. When the graph is descending, large caps have the advantage, when the line is rising; small caps are taking the lead. Typically, large cap stocks are in control for most of the year. Then just before yearend, around mid-December, small stocks takeoff and keep sprinting ahead until early March....


See also our December posts:

And a Little Stock Shall Lead Them II: January Effect in December
Year-end bounce for small caps?-Commentary: "January Effect particularly risky bet this year"