Last Updated on August 26, 2021 by Oddmund Groette
The January effect has for a long time been an anomaly that showed abnormal returns.
However, the original January effect has not worked well for many years.
Below we provide you with another January effect that seems to work:
The January effect that works
On page 279-280 in The Education of a Speculator, Victor Niederhoffer explains his version of the January effect: The gain in January determines the average gain for the next 11 months.
Does this hypothesis still hold? It does:
If the S&P 500 decline in January, the average percentage change for the next eleven months is 2.25%. If the S&P 500 rises during January, the average percentage change in the next 11 months is 10.4%. This is the new January effect.
The chart below is 100 000 compounded when January showed a decline (entry is on the open of the first trading day of February, and the exit is on the open of the first trading day in January of the next year):
The first real drawdown happened in 1974, and the strategy never really recovered after that. The decade-long bull market of 2010-2020 made the strategy recover somewhat.
When January is positive, the equity curve looks like this:
Quite a difference, to put it mildly. When January is up, the win ratio is 83%. When January is down, the win ratio drops to 62%. The reason why this strategy seems to work is because of the occasionally large losers when January is down. For example, it happened in 1974 and 2008, two years which went on to fall substantially the rest of the year.
If you want the code for this strategy, please press this link:
For more trading strategies, please have a look at this page:
Disclosure: We are not financial advisors. Please do your own due diligence and investment research or consult a financial professional. All articles are our opinions – they are not suggestions to buy or sell any securities.