One of the most discussed seasonal anomalies is the January Barometer. January barometer is a calendar anomaly that says that equity index returns from February to December could be forecasted by the January performance of the particular equity index. The theory says that a strong January should predict the strong performance of the whole year and vice versa. Although statistic says that the average market return over the 11 months was significantly higher following January in which the market return was positive compared to the average market return over the 11 months following January in which the market return was negative, this strategy should be taken with caution.
While the January Barometer should contain valuable information (however it may be just a data mining), the January Barometer would have led an investor to be long the market during four of the five worst 11-month post-January intervals over the 152 years long backtesting period. Moreover, this simple long/short strategy would also lead the investor into disastrous short trades during bull markets. The aforementioned negative outcomes could be partially eliminated by the usage of a long position in the equity index combined with the bonds. However, it is still questionable whether the strategy is rationally based or is the product of the upward trend of equities for a long time. However, according to the paper, the best usage of this barometer is the combination of equity index and treasury bonds with a simple rule to buy index after a strong January or to buy bonds after weak January. The strategy mentioned above should outperform passive long-only strategy through the whole backtesting period, the long/short strategy according to Januarys, and the long leg only of the January barometer strategy.
The fundamental reasons for the persistence of this anomaly in the future are very weak, and any rational explanation cannot be found. However, the whole anomaly is probably only a consequence of data mining. Additionally, the spread between the market timing using the January Barometer and passive investment in the equity market is so small that it is probably not interesting (or wise) to pursue this strategy. On the other hand, there is a large amount of research that does not support this strategy, for example, Huang: “Real-Time Profitability of Published Anomalies: An Out-of-Sample Test“: The Other January Effect (OJE), which suggests positive (negative) equity market returns in January predict positive (negative) returns in the following 11 months of the year, does not outperform a buy-and-hold approach in the US equity market and therefore adds no value to market timers. There is also no evidence of the OJE working consistently on individual stocks or international markets.” or the work of Marshall and Visaltanachoti, “The Other January Effect: Evidence Against Market Efficiency?“: “The Other January Effect (OJE), which suggests positive (negative) equity market returns in January predict positive (negative) returns in the following 11 months of the year, underperforms a simple buy-and-hold strategy before and after risk-adjustment. Even the best modified OJE strategy, which benefits from several ex-post adjustments, does not generate statistically or economically significant excess returns.”
Last but not least, Stivers, Sun and Sun in their work: “The Other January Effect: International, Style, and Subperiod Evidence” state that: “Our evidence indicates that the OJE is primarily a US market-level-based phenomenon that has diminished over time, which suggests a `temporary anomaly’ interpretation.”Therefore, this strategy should be considered with caution or maybe not traded at all, although the popular press tends to like it.
Backtest period from source paper
Confidence in anomaly's validity
Notes to Confidence in Anomaly's Validity
OOS back-test shows slightly negative performance. It looks, that strategy’s alpha is deteriorating in the out-of-sample period.
Notes to Indicative Performance
per annum, return from table 3 (Long/T-bill strategy), benchmark return 9.98% (equity index)
Period of Rebalancing
Notes to Period of Rebalancing
Notes to Estimated Volatility
volatility from table 3 (Long/T-bill strategy), benchmark 19.2% (equity index)
Number of Traded Instruments
Notes to Number of Traded Instruments
Notes to Maximum drawdown
Notes to Complexity Evaluation
CFDs, ETFs, funds, futures
Simple trading strategy
Invest in the equity market in each January. Stay invested in equity markets (via ETF, fund, or futures) only if January return is positive; otherwise, switch investments to T-Bills.
Hedge for stocks during bear markets
No - The strategy is timing equity market but invests long-only into the equity market factor; therefore, it is not suitable as a hedge/diversification during market/economic crises.
Out-of-sample strategy's implementation/validation in QuantConnect's framework