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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