The Speculator's
Corner
Planning Around January Is a Chancy Strategy
By Laurel Kenner and Victor Niederhoffer
2/3/00
3:30 PM ET
URL: http://www.thestreet.com/comment/thespeculatorscorner/876591.html
"The first is most right." - Russian proverb.
When Vic ruled the courts as a champion squash player, he started every game with the thought, "The first blow is half the battle." Then he came in with a hard serve, first point. This usually gave the game a nice start, and the first few points often set the tone for the match as his opponent tried to play catch-up.
A similar phenomenon is true in most board games, like checkers and chess. The first player wins an inordinate amount of the time.
Proverbs about "firsts" remind us of the January barometer popularized by Yale Hirsch in his magnificent series of Stock Traders' Almanacs. The gist is that the move in January calls the direction of the market for the year. As Hirsch puts it, "As January goes, so goes the market." The rest of the quote, usually omitted, is, "in odd-numbered years."
It's true that the January barometer, since 1937, has a perfect record predicting direction in odd-numbered years. Fortunately for investors, but unfortunately for statisticians, since 1984 there have been only two down Januarys, in 1992 and 1990 -- both of them even-numbered years.
Vic first heard about the January barometer in 1966, when he stumbled on a group of drunk technical analysts late one night at the Myopia Hunt Club, where he was working as a tennis coach. Years later, he calculated that, between 1935 and 1995, the correlation between January's performance and the subsequent 11 months was 0.15. That amounts to a 1-in-20 shot through chance variation.
Considering the limited size of the sample, the results are quite consistent with chance. In other words, it would be amazing not to find something like a January effect. When we go back and change all the starting points and months and take out certain years, we're really testing a lot of different things. When you test a lot of theories, one of them's going to work, even if it's chance.
In the spirit of millennial optimism, we examined a January-effect theory of our own. Do the stocks that go up the most in January show good performance in the subsequent 11 months? More generally, does individual stock performance in January foretell any subsequent nonrandom movements during the rest of the year?
The best reasons to think this might be the case are the proverbial ones: "The first is most right." "The first blow is half the battle."
It's likely that decisions are made at the beginning of the year, and that these tend to set the tone for similar decisions and performance during the following 11 months. Proverbs and suppositions must be tested. We took the 500 individual companies that comprise the Standard & Poor's 500 as our sample.
Of course, the members of the S&P 500 today are quite different from the ones at the beginning of 1997. In fact, there is only about a 75% overlap. Many of the original companies that performed badly in our sample and continued to perform badly would have ended up being removed from the index, replaced by such highfliers as Yahoo! (YHOO:Nasdaq), Qualcomm (QCOM:Nasdaq), America Online (AOL:NYSE), Nextel (NXTL:Nasdaq), Biogen (BGEN:Nasdaq) and EMC (EMC:NYSE). But we adjusted for this survivor bias.
We chose as our good-performing group the 10 companies that showed the largest percentage price appreciation in the first month of the year. The bad-performing group had the largest percentage declines. We compared the two groups' performance for the following 11 months in the years 1997, 1998 and 1999. The results follow:
| Do the Best Performers in
January Stay Out in Front? Recent results are little better than chance | ||
| Year | Subsequent performance of those 10 stocks with the best and worst performance in January | |
| Best Return | Worst Return | |
| 1997 | 0% | 11% |
| 1998 | 39% | -2% |
| 1999 | 74% | 11% |
| Source: V. Niederhoffer | ||
The results suggest that during 1998 and 1999, there was a strong January effect for the best-performing stocks. However, because of the high variability of the returns of the individual companies in these two groups, these results would occur in about a 1-in-10 shot through chance variation. Furthermore, the results for 1997 do not support the theory.
Thus, it's likely that investors who buy January winners will experience the same kind of results they would achieve by throwing darts to select their companies.
However, hope springs eternal. Here are this January's 10 best S&P 500 performers:
Disney -- up 24%
AT&T -- up 4%
Intel -- up
20%
IBM -- up 4%
Merck -- up 18%
Exxon Mobil --
up 4%
General Motors -- up 11%
Citigroup -- up 4%
Boeing -- up 7%
American Express -- up 3%
The market is ever-changing, complex, nonlinear and fathomless -- like wind, weather and romance. Investment decisions based on any simplistic approach, including January effects, are fraught with danger.
If there were a perfect formula, it would quickly lose its efficacy as its specifications became widely known and people began front-running. However, guessing, counting and reformulating, as we have done above, is a great way to create a little order within the ocean of uncertainty that is the market.
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Laurel Kenner is a former markets editor of Bloomberg, and a trader. Former hedge fund manager Victor Niederhoffer is currently a private investor and author of Education of a Speculator. At time of publication, Kenner was not long any of the issues in this column, while Neiderhoffer was net long S&P 500 futures and options, although positions can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. While they cannot provide investment advice or recommendations, they invite you to comment on this column at mailto:%20commentarymail@thestreet.com.
