StockFetcher Forums · General Discussion · January Effect<< >>Post Follow-up
TheRumpledOne
6,358 posts
msg #58459
Ignore TheRumpledOne
12/24/2007 12:50:40 AM

Ignore the theory. Here's an easier way to bank gains every January.
By Ian Cooper | Friday, December 21st, 2007

The latest January Effect article argues that capitulation lows, short covering sprees, low valuations, high cash and low to no debt, negative analyst coverage, strengthening U.S. dollar, and future M&A activity are good enough reasons to sink money solely into the January effect. While I’d agree that a stronger dollar would bring more investment activity back to the U.S., relying on the antiquated, unreliable theory isn’t a great idea.

As we said on December 11 , the January effect is the “expected” time of year when tax conscious investors sell stocks to write off losses against capital gains. The “tax sell-off” would depress stock values lower until buyers came back in early January.

And, yes, for awhile it was a flourishing, profitable theory. Bullish January effect theorists will remind you that from 1925 to 1993, small cap stock outperformed large cap stocks in January in 69 of 81 years. All you had to do was buy small cap stocks in mid-December and hold until the last day of January. It was like having a license to print money, as small caps, on average, returned 7% every January as compared to 2% for large caps.

But since 1994, for example, it’s had off and on years. Comparing the Russell 2000 to the Dow, using the dates of December 1st to February 1st as my parameters, for example, I found that in:

* 1994, the large caps stocks outperformed small caps
* 1995, the large cap stocks outperformed small caps
* 1996, the large cap stocks outperformed small caps
* 1997, the large cap stocks outperformed small caps
* 1998, the large cap stocks outperformed small caps
* 1999, small cap stocks outperformed large caps
* 2000, small cap stocks outperformed large caps
* 2001, small cap stocks outperformed large caps
* 2002, small cap stocks outperformed large caps
* 2003, small cap stocks outperformed large caps
* 2004, the large caps stocks outperformed small caps
* 2005, the large caps stocks outperformed small caps
* 2006, small cap stocks outperform large caps
* 2007, the large caps stocks outperformed small caps

Truth is, while the theory is still used, it’s not as reliable as it was from 1925 to 1993.

So how do you profit in January 2008. First of all, ignore the theory. Second, take a look at small cap stocks like MIPS Technologies (MIPS:NASDAQ), and see how they’ve technically performed every January, even in an economic slowdown. These are the “historical” gems you want to own for quick run ups.

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