New Year 2019 is extremely special for me because I get to write a New Year’s blog post. I want to diverge from history and talk about ‘Calendar Effects’ – an informal treatise on stock price behavior corresponding to calendar events.
We start off the year with the ‘January Effect’, which is a surge in stock prices in the month of January.
There are two plausible explanations for this:
The first is that in December, portfolio managers sell off their underperforming securities to record losses. These losses offset any capital gains that they record during the year, thus reducing tax liability. This selling wave leads to a decrease in stock prices in December. Then in January, the portfolio managers buyback those stocks to complete their portfolios. This buying wave leads to the increase in stock prices known as ‘The January Effect’.
The second explanation is that investors use the cash bonuses they receive at the end of the year to purchase stocks in January. This adds to the buying wave and results in an increase in stock prices.
The January Effect is one of many calendar effects observed in stock market.
‘The Halloween Indicator’ is another one of these. This phenomenon, also known as ‘Sell in May’, hypothesizes that stock market returns are best during the holiday season of November to April. Hence, selling stocks in May and holding cash until November is the best strategy.
That said, stock market returns are extremely volatile. Trading strategies based solely on these effects may lead to ruinous outcomes. The key take-away here is that we should avoid active confrontation with the aforementioned phenomena because historical trends reveal that these effects, stemming from collective behavior, merit attention.
All the best for this new trading year and a happy new year!
Plain Vanilla Finance 