Small caps benefit most from January effect
The January effect, whereby stocks rally in the first month of the year in an apparent reversal of the tax-loss selling in December, is a well-known phenomenon, but it’s more pronounced for smaller-cap stocks…
From the Energy Metal News archive. This article dates from Dec 12, 2017 and is preserved as first published.
The January effect, whereby stocks rally in the first month of the year in an apparent reversal of the tax-loss selling in December, is a well-known phenomenon, but it’s more pronounced for smaller-cap stocks, particularly those that performed poorly in the previous year.
Yet some research indicates that higher transaction costs, including lower trading volumes and wider bid-ask spreads in the weakest-performing small caps, make it difficult to profit from the January effect.
Eric Solver and Barry Knapp, equity strategists at Barclays, took a closer look at this phenomenon between 1986 and 2012.
Eric Solver and Barry Knapp, equity strategists at Barclays, took a closer look at this phenomenon between 1986 and 2012.
They identified that the 5% worst-performing U.S. small caps as a group produced stronger returns (roughly 120 basis points) than the Russell 2000 index over both the full sample period and the past 10 years.
As a result, the strategists told clients to be cautious about maintaining short positions in stocks that might benefit from this seasonal trend.
