Does the January Effect exist? The CXO Advisorylooks at the S&P Composite Stock Index from January 1871 to November 2008 and concludes in the affirmative, albeit with a caveat.
They found that January has the highest average return (1.5%) of all the months. It also has the lowest standard deviation (2.9%), which makes the outperformance even better on a risk-adjusted basis. However, CXO Advisory warns that the January uptick appears to be on a downtrend. Indeed, the current decade from 2001 to 2008 is the only decade that the January Effect has been negative.
But eyeballing their data, one could arrive at a more encouraging interpretation. The 1930s and 1970s saw noticeably above-average January gains of 2% and 3%, respectively. As the stock market in the current decade is turning out to be similarly volatile, perhaps the Januaries to come in 2009 and 2010 could see strong rallies after all.
The thesis could be that there is unusually heavy tax-loss selling during the down years in turbulent decades. They are then followed by unusually heavy buying to re-instate positions in the stocks sold for tax reasons. For more, see Big January Effect this year?