January Return-Based Equity Timing Strategy
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What's the Best Way to Trade Using the January Barometer?
Michael J. Cooper; John J. McConnell; Alexei V. Ovtchinnikov
- University of Utah
- ?University of Utah - David Eccles School of Business
- Purdue University West Lafayette
- ?Purdue University
- HEC Paris
- ?HEC Paris - Finance Department
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.
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.
Backtest performance
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()