Monday, July 8, 2013

The January Effect in May

According the original authority on seasonality – the Stock Traders Almanac describes the so-called January Effect to be often mistaken for the January Barometer created by Yale Hirsch in 1972, which simply states that as January goes so goes the year. The January Effect refers to the tendency for small-cap stocks to outperform large-cap stocks in January. So that means the smaller company Russell 2000 will out perform the bigger company Russell 1000 or the Dow Jones Industrial Average.

There may be two reasons for the January Effect – one could be tax loss selling in December and the subsequent January recovery and, the other reason could be the sensitivity of the smaller companies to the domestic U.S. economy. In other words a strong smaller company sector is a bullish leading indicator.

So now it is June and the smaller cap Russell 2000 is once again, out performing the larger cap stock indices. We know the tax loss selling reason has passed – so we may now reasonably assume the Russell 2000 is out performing because of a bullish outlook for the U.S. economy and that is the reason why the seasonal trade to “sell in May and go away” may – once again fail to work this year.

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