January Return-Based Equity Timing 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.”

ASSET CLASS: CFDs, ETFs, funds, futures | REGION: Global | FREQUENCY: Monthly | MARKET:
equities | KEYWORD: January, Calendar

I. STRATEGY IN A NUTSHELL

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.

II. ECONOMIC RATIONALE

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.

III. SOURCE PAPER

What’s the Best Way to Trade Using the January Barometer? [Click to Open PDF]

Michael J. Cooper, University of Utah – David Eccles School of Business ; John J. McConnell, Purdue University ; Alexei V. Ovtchinnikov, HEC Paris – Finance Department

<Abstract>

According to Streetlore, as embedded in the adage ‘As goes January so goes the rest of the year,’ the market return in January provides useful information to would-be investors in that the January market return predicts the market return over the remainder of the year. This adage has become known as the January Barometer. In an earlier paper (Cooper, McConnell and Ovtchinnikov, 2006) we investigated the power of the January market return to predict returns for the next 11 months using 147 years of U.S. stock market returns. We found that, on average, the 11-month holding period return following positive Januarys was significantly higher, by a wide margin, than the 11-month holding period return following negative Januarys. In this paper we update that analysis through 2008 and address the question of how an investor can best use that information as part of an investment strategy. We find that the best way to use the January Barometer is not the obvious one of being long following positive Januarys and short following negative Januarys, but to be long following positive Januarys and invest in t-bills following negative Januarys. This strategy beats various alternatives, including a passive long-the-market-all-the-time strategy, by significant margins over the 152 years for which we have data.

IV. BACKTEST PERFORMANCE

Annualised Return	10.38%
Volatility	16.8%
Beta	0.252
Sharpe Ratio	0.179
Sortino Ratio	0.153
Maximum Drawdown	27.7%
Win Rate	62%

V. FULL PYTHON CODE

from AlgoLib import *

class JanuaryBarometer(XXX):

    def Initialize(self):
        self.SetStartDate(2000, 1, 1)
        self.SetCash(100000) 
        
        leverage:int = 5
        data:Equity = self.AddEquity("SPY", Resolution.Daily)
        data.SetLeverage(leverage)
        self.market:Symbol = data.Symbol
        
        data:Equity = self.AddEquity("SHY", Resolution.Daily)
        data.SetLeverage(leverage)
        self.bond:Symbol = data.Symbol
        
        self.max_missing_days:int = 5

        self.start_price:float|None = None
        self.recent_month:int = -1
        
    def OnData(self, data):
        if self.recent_month == self.Time.month:
            return
        self.recent_month = self.Time.month
        
        if self.Securities[self.market].GetLastData() and self.Securities[self.bond].GetLastData():
            if (self.Time.date() - self.Securities[self.market].GetLastData().Time.date()).days < 5 and (self.Time.date() - self.Securities[self.bond].GetLastData().Time.date()).days < self.max_missing_days:
                if self.Time.month == 1:
                    self.Liquidate(self.bond)
                    self.SetHoldings(self.market, 1)
                    
                    self.start_price = self.Securities[self.market].Price
                    
                if self.Time.month == 2 and self.start_price:
                    perf:float = self.Securities[self.market].Price / self.start_price - 1
                    if perf > 0:
                        self.SetHoldings(self.market, 1)
                    else:
                        self.start_price = None
                        self.Liquidate(self.market)
                        self.SetHoldings(self.bond, 1)
            else:
                self.Liquidate()
        else:
            self.Liquidate()