December is not here yet, but that does not mean investors should not start preparing for the January Effect, the phenomenon where small-caps lead large-caps in the first month of the year. The ramifications of the January do not end there.
If small-caps do the leading in January AND the broader market finishes the month higher, history shows there is an excellent chance stocks will finish the year on an up note. [ETFs for the January Effect]
“According to the Stock Trader’s Almanac, from 1953 to 1995 small-caps outperformed large-caps in January 40 out of 43 years. But after the crash of 1987, this out-performance from the small-caps started to get going in mid-December. Perhaps it was no longer a secret? Who knows. But now this market is taking it step further. Last year in 2012, the small-cap out-performance began in mid-November. The ratio bottomed out on November 15th and rallied all the way into mid-March. So with all that in mind, is it so ridiculous to start talking about it this early?,” writes J.C. Parets of Eagle Bay Capital.
There are some faint signs that investors are preparing for a January Effect and perhaps one that arrives early. Although the iShares Russell 2000 ETF (IWM) has lost assets this month, the WisdomTree SmallCap Dividend Fund (DES) and the Schwab U.S. Small-Cap ETF (SCHA) have seen inflows.
The PowerShares DWA SmallCap Momentum Portfolio (DWAS) , already one this year’s best small-cap ETFs and itself a prolific gather of assets, has taken in $26 million since the start of November. [Remember This Small-Cap ETF if Rates Rise Again]
As for how potent the January Effect can be, particularly when it starts early, recent history serves as proof. From Dec. 3, 2012 to Jan. 31, 2013, DWAS, IWM and SCHA all gained at least 10%. The S&P 500 is up 23.3% this year.
Chart Courtesy: Eagle Bay Capital
ETF Trends editorial team contributed to this post. Tom Lydon’s clients own shares of IWM and SCHA.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.