Is The January Effect Falling Out of Favor?

By: William “Bill” Speth, Chief Research Officer

As the 2021 trading year draws to a close, investors are focusing on navigating a new
trading year that promises to be filled with potentially significant changes. The Federal
Reserve is expected to incrementally end the easy-money policies that have sustained the
economy since the Global Financial Crisis. The expectation is sending tremors across the
stock and options market.

Interestingly, one of the most popular seasonal trading patterns –the January Effect –
seems to be falling out of favor despite the widespread belief that small-cap stocks tend
to outperform large-cap stocks in January.

Still, an analysis of small-cap volatility compared to large-cap volatility presents an
interesting setup.

During the past 52 weeks, IWM has ranged from $187.08 to $244.46. Some investors
believe small-caps may rebound and that valuation will be viewed as attractive.
Others are pessimistic; two-sided December flow indicates uncertainty.

The question becomes how can investors potentially monetize seemingly attractive
conditions amidst macro-uncertainty?

We are seeing investors bullishly and bearishly position in IWM. The lack of a
consensus among investors suggests that there is significant disagreement about
what happens next for small-cap stocks despite the widespread belief in the January

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