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Seasonality and January reversal

Ilya Figelman writes in the latest issue of Journal of Portfolio Management the research findings on seasonality and market reversals.

Ilya has studied the monthly returns behaviour of all the stocks in S&P500 between the periods of January 1970 to December 2004. The methodology used is by decomposing the profitability, momentum and reversal effects by calendar months.

Seasonality

Regarding the seasonality of the returns Ilya states “I also show the short-term reversals, intermediate-term, long-term reversals, yearly periodicity, are enhanced in the months the firm announces earnings.” The possibility of reversals at the time of announcements of the earnings is not much of a surprise. But Ilya further states “Quarterly periodicity is not affected by earnings announcements, which is somewhat surprising.” This is a surprise, given the obsession with quarterly results.

It gets a bit more interesting.

“The strongest momentum months are June, September and December. This somewhat supports the window-dressing explanation of momentum- that fund managers are inclined to buy past out-performers and sell past under-performers at the end of each quarter. They want clients to think they have been selecting good stocks.” [LOL Ilya, you rock!]


January Reversals

Ilya states “There appears strong inverse relation between returns in January month and past cumulative returns for short, intermediate and long horizons. Particularly interesting is that, for the intermediate-term horizon, where there is a strong momentum effect in total, there is a strong reversal in January.”

Ilya concludes “For all three time horizons (short-term, intermediate-term, long-term), there is a stronger return reversals in January than in other months. In fact, a significant portion of the profit from the long-term reversal strategy is gained in January months.”

According to the research the returns in the non-statistical months in comparison are not significant.

These are just something that interested me, especially since we seem to have made some kind of top in January. Ilya, delves deeper into seasonality and returns. Please check the article in Journal of Portfolio Management for more.

:) Falkor
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