Monday, December 22, 2008

Year-end bounce for small caps?-Commentary: "January Effect particularly risky bet this year"

Great minds and all that. Friday we posted "And a Little Stock Shall Lead Them II: January Effect in December". Today, at MarketWatch Mark Hulbert says:

Ordinarily, I would feel comfortable urging you to consider a strategy over the next couple of weeks that attempts to exploit the so-called January Effect.
But, as is abundantly clear, we are not in ordinary times.
So let me review the historical evidence, and you be the judge.
The January Effect, of course, is the seasonal tendency for stocks of small companies to outperform the large-caps around the turn of the year. Its existence has been widely known for over two decades. And in back testing, researchers have found that it existed in many prior decades too.
In fact, it is one of the strongest historical patterns that researchers have ever documented in the stock market.
Furthermore, despite predictions that widespread awareness of its existence would cause it to disappear, the January Effect -- with some notable exceptions -- has remained remarkably robust. In fact, some of its most profitable years have come this decade.
Why, then, am I so cautious?
Because the January Effect appears to owe its existence in large part to investment managers' increased appetite to invest in riskier stocks once the New Year begins. That appetite will be dampened if the bear market takes another leg down over the next couple of weeks, causing those managers to avoid the riskier small-caps....MORE