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In a new article "25 Top Stocks to buy on a January Dip", Michael Brush hypothesizes that stocks which do well in a given year tend to have an early January dip down after which they continue to perform above average. He believes this January dip is caused by investors waiting until after the new year to sell their winners, since capital gains taxes can then be avoided for a full year. This is the opposite of the well known “January Effect”, where stocks which have done poorly in the previous year tend to perform strongly in January.
To test this (with a little help from the Spec Duo): Each year-end from 1997 to 2003, we divided the stocks in the S&P 500 into 5 equal-sized groups based on previous 12 months performance. We call the best performing stocks “Winners” and the worst performing stocks “Losers”. Then we measured the subsequent performance of these groups in the first week, second week, and subsequent quarters of the following year.
1.) In all but one year from 1997 to 2003, the previous year Winners was the worst performing group in the first week of subsequent year.
2.) In each sample year except for 2004, Winners continued to outperform Losers in first 3 months of the year.
3.) During the subsequent 12 months, the Winners handily outperformed the Losers, but much of that outperformance is attributable to a few good years during the Technology boom. See List of Recommend Stocks Go to year-by-year results..