THE JANUARY EFFECT
Today I’m examining a trading strategy called the “January Effect“. This trading strategy is aptly named because it’s designed to be traded only in the month of January. I’ve run the numbers and now it’s time to reveal if this trading strategy is a money maker or a money burner.
Wall Street has maintained that stocks rise in January. As such, going long with a buy and hold approach is the way to trade the January Effect. Here is what Investopedia has to say about the January Effect:
A general increase in stock prices during the month of January. This rally is generally attributed to an increase in buying, which follows the drop in price that typically happens in December when investors, seeking to create tax losses to offset capital gains, prompt a sell-off.
How Effective Is The January Effect?
To test any strategy, you need a good 10 years, so I went back to 2009, the beginning of the greatest bull market of all time. With a 10 year time frame, and the greatest bull market of all time, surely the “experts” must have made money.
As you can see, the experts work with outdated data. The latest data shows us, stocks go down in January (see chart below). Small caps drop even more.
Trade The January Effect The Right Way
OK, the strategy is a proven money burner. But not all is lost. We can take this info and make BIG GAINS off it.
Since we know that small caps drop the most in January, why not short the Russell 2000 (index of 2000 small cap stocks)? We can do this easily buy buying and holding TZA during the month of January.
As you can see in the chart above, just buying and holding TZA would have earned us an average 2.60% per month. Very good for a losing month in the stock market.
The returns of TZA are impressive in January. Anyone can buy and hold this ETF. Perfect for beginner or pro alike and it’s simple to implement.
One word of caution. You can see there are two years with big losses. If you trade this, be prepared and willing to accept a big loss. To be the most effective, you need to trade the strategy every January for many years to come (unless you get lucky the first year).
With every trading strategy I test, I like to compare the results against my popular Index Trading Strategy. It also uses TZA in January but with a twist, something I call…
TZA on Steroids
As you can see in the chart, subscribers to my Index Trading Strategy have made almost 2x more than TZA alone. Instead of buying and holding TZA, we only buy it during optimal times in the month of January.
With a $10,000 portfolio that’s an extra $200+ monthly profit over just buying and holding TZA. Not bad for a $20 investment. You can get more info here.
There is no guarantee the next 10 years will produce the same results, but we can only make decisions on the future based on our past experiences.