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Calendar Based Stock Market Anomalies

January Effect | Turn of the Month Effect | Monday Effect | Years ending in 5

Gary Karz, CFA (email)
Host of InvestorHome
Principal, Proficient Investment Management, LLC

The January Effect

     Stocks in general and small stocks in particular have historically generated abnormally high returns during the month of January. According to Robert Haugen and Philippe Jorion, "The January effect is, perhaps the best-known example of anomalous behavior in security markets throughout the world." 1 The January Effect initially persisted long after it's initial discovery, but some argue it has diminished over time. Theoretically an anomaly should disappear as traders attempt to take advantage of it in advance. Additionally, many have argued that some of the other anomalies occur primarily or entirely during the month of January (See Interrelationships). The bottom line is that January has historically been the best month to be invested in stocks.

The effect is usually attributed to small stocks rebounding following year-end tax selling. Individual stocks depressed near year-end are more likely to be sold for tax-loss recognition while stocks that have run up are often held until after the new year. Some people have suggested at times that the January effect had moved into November and December as a result of mutual funds being required to report holdings at the end of October and from investors buying in anticipation of gains in January. Some studies of foreign countries have found that returns in January were greater than the average return for the whole year. Interestingly, the January effect had also been observed in many foreign countries including some (Great Britain and Australia) that don't use December 31 as the tax year-end. This implies that there is more to the January effect than just tax effects. See also The Incredible Shrinking January Effect by William Bernstein (1999).

In The January Effect (Financial Analysts Journal September/October 2006) Mark Haug and Mark Hirschey summarized that "Analysis of broad samples of value-weighted and equal-weighted returns of U.S. equities documents that abnormally high rates of return on small-capitalization stocks continue to be observed during the month of January. This January effect in small-cap stock returns is remarkably consistent over time ... After a generation of intensive study, the January effect continues to present a serious challenge to the efficient market hypothesis." (Presentation).

     January is also watched closely by many because strong market performance in January has historically indicated strong performance for the rest of the year. Forthcoming from Michael Cooper, John McConnell, and Alexei Ovtchinnikov is What’s the Best Way to Trade Using the January Barometer? in The Journal of Investment Management, which follows their prior article The Other January Effect in the Journal of Financial Economics (2006).

Turn of the Month Effect

Stocks historically show higher returns around the turn of the month. Lakonishok and Smidt coined the phrase 2 and Frank Russell examined returns of the S&P 500 over a 65 year period finding that U.S. large-cap stocks consistently show higher returns at the turn of the month. Chris Hensel and William Ziemba 3 presented the theory that the effect results from cash flows at the end of the month (salaries, interest payments, etc.). They found returns for the turn of the month were significantly above average from 1928 through 1993 and "that the total return from the S&P 500 over this sixty-five-year period was received mostly during the turn of the month." The study implied that investors making regular purchases may benefit by scheduling to make those purchases prior to the turn of the month.

     In Equity Returns at the Turn of the Month (which earned a Graham and Dodd Scroll Award) John McConnell and Wei Xu studied CRSP daily returns for the 80-year period of 1926-2005 (earlier version). Specifically, "turn-of-the-month is defined as beginning with the last trading day of the month and ending with the third trading day of the following month." They found that the turn-of-the-month effect is pronounced over the recent two decades such that, when we combine our findings with those of Lakonishok and Smidt, the result is that over the 109-year interval of 1897-2005, on average, all of the positive return to equities occurred during the turn-of-the-month interval. They also concluded that it is not confined to small and low-price stocks, calendar year-ends or calendar quarter-ends, to the U.S, and is not due to a buying of shares at the turn-of-the-month since trading volume isn't higher and the net flows of funds to equity funds is not systematically higher. They concluded that the turn-of-the-month effect in equity returns poses a challenge to both “rational” and “behavioral” models of security pricing and it continues to be a puzzle in search of a solution.

The Monday Effect

Monday tends to be the worst day to be invested in stocks. The first study documenting a weekend effect was by M. J. Fields in 1931 in the Journal of Business at a time when stocks traded on Saturdays. Fields had also found in a 1934 study that the DJIA commonly advanced the day before holidays. Several studies have shown that returns on Monday are worse than other days of the week. Larry Harris studied intraday trading and found that the weekend effect tended to occur in the first 45 minutes of trading as prices fall, but on all other days prices rise during the first 45 minutes. 4 This anomaly presents the interesting question: Could the effect be caused by the moods of market participants? People are generally in better moods on Fridays and before holidays, but are generally grumpy on Mondays (in fact, suicides are more common on Monday than on any other day). Investors should however, keep in mind that the difference is small and could be difficult to take advantage of because of trading costs. More related studies including international findings can be found at Weekend Effect at

Years ending in 5?

This falls more in the data mining than the anomaly department, but it is interesting nonetheless. In its existence prior to 2005, the DJIA had never had a down year in any year ending in 5. According to Bigcharts the DJIA ended on 12/31/2004 at 10,783.01 and 12/30/2005 at 10,717.5, so that streak appears to have ended, although with dividends there would have been a total return gain and the Wilshire 5000 shows a 6% gain for the year ended 12/30/2005.

1. Robert Haugen and Philippe Jorion, The January Effect: Still There after All These Years Financial Analysts Journal, January-February 1996.

2. Josef Lakonishok and Seymour Smidt, 1988, Are seasonal anomalies real? A ninety-year perspective Review of Financial Studies 1988 1(4), 403-425.

3. Chris R. Hensel and William T. Ziemba, "Investment Results from Exploiting Turn-of-the-Month Effects," Journal of Portfolio Management, Spring 1996.

4. Lawrence Harris, "A Transaction Data Study of Weekly and Intradaily Patterns in Stock Returns," Journal of Financial Economics, June 1986.

This page is not a stand-alone page and should not be read or used without first viewing the main Anomalies page which includes important information and warnings about interpreting historical stock market anomalies.

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