The January effect is a well-known seasonality and anomaly. To our knowledge, it was published as a strategy for the first time in 1962, according to Victor Niederhoffer in the book The Education of a Speculator, a book any aspiring speculator should read. Does the January effect still exist?
Unfortunately, the January effect seems to have vanished. The January effect worked nicely for many decades and showed abnormal returns, but not anymore.
What is the January effect? What is meant by the January effect?
The January effect is easy to explain: That is (was) a seasonal effect that gave a push in the stock market during January. That means the monthly performance in January was higher than the average month rest of the year.
Why is it a January effect?
The most likely reason for the January effect is that investors shuffle more money into stocks.
Does the January effect still exist?
Unfortunately, the January effect stopped working about two decades ago. This is the equity curve in the S&P 500 compounded from 1960 until January 2020:
As we can see, the strategy stopped performing about the turn of the millennia.
If you want to have the Amibroker or Tradestation code for the January Effect (and much of the code for our free trading strategies), please press this link:
Why doesn’t the January effect work anymore?
That is of course difficult or impossible to explain. However, as we have written numerous times, good strategies eventually grind to a halt. When something gets too obvious, it usually stops working. This is how markets work.
The January effect that works:
The old and traditional January effect seems to have stopped working, but there is another January effect that seems to work.
