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  • How to Play the January Effect 0 comments
    Dec 22, 2009 9:50 AM | about stocks: IWM, DOG, UWC, DXD

    It's end of November and some investors might be thinking of playing the January effect. The January effect is an observation, first noted by Donald Keim of the University of Chicago, that small-capitalization stocks overperform large-capitalizations stocks over December-April, but especially in January.

    I was wondering what low-cost trades small investors could do to play the January effect. I came up with three alternatives:
    1) No-Leverage Alternative - long IWM (Russel 2000 Index ETF) and long DOG (DJIA Daily Short ETF)
    2) Option Alternative - long IWM and buy a Feb 10 Put on DOG @ the money.
    3) Leveraged Alternative - long UWC and long DXD

    The January effect was confirmed for international stock markets too. Here is a way to play the idea for European investors:
    1) No-Leverage Alternative: Long LU0328475792 (DJ EURO STOXX 600 ETF) a long LU0292106753 (short daily DJ EURO STOXX 50 ETF)
    2) Option Alternative: Long LU0328475792 (DJ EURO STOXX 600 ETF) and buy a Feb 10 Put on DJ EURO STOXX 50 @ the money (Boerse Stuttgart, for instance).

    References:
    Keim, Donald B, 1983, Size-Related Anomalies and Stock Return Seasonality: Further Empirical Evidence, Journal of Financial Economics.
    Boudreaux, Denis O, 1995, The Monthly Effect in International Stock Markets: Evidence and Implications, Journal of Financial and Strategic Decisions 8(1).

    Disclaimer:
    This post is intended as financial education. It does not constitute a solicitation of business or investment advice. This is the author's personal opinion and is not any way related to any business he might work for now or in the past.


    Disclosure: Disclosure: No position in stocks mentioned

    Stocks: IWM, DOG, UWC, DXD
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