December 4, 2009

Is the "January Effect" really a Capricorn Effect?

As far as I know it was Yale Hirsch, one of the pioneering researchers of seasonal cycles in the stock market and the founder of the Stock Trader's Almanac (now in its 43rd edition), who initially identified the January Effect.

The January Effect is simply the tendency for small-cap stocks to outperform the blue chips around the first of the year. In fact, Hirsch's research showed that during Januarys between 1953 and 1995, the performance of the small caps roughly quadrupled the performance of their large-cap cousins 93% of the time!

In the 2009 edition of the Stock Trader's Almanac, however, there's a brief article about additional, more detailed research into the January Effect. It seems that the phenomenon disappeared altogether for a few years, and then its timing began to shift a bit.

Currently the trend toward small-cap superlatives begins in mid-December instead of after the first of the year.

It's just after the middle of December, of course, when we have the Winter Solstice on December 21, as the Sun moves into Capricorn. That transit continues through January 20, neatly corresponding with the booming performance of small-cap stocks.

You won't find any mention of astrology in the Stock Trader's Almanac, which is why the "January Effect" hasn't officially been renamed the "Capricorn Effect".

Not until now, that is.