The historical tendency for smaller companies to outperform in January, traditionally attributed to tax-loss selling reversing.
The original explanation was mechanical: investors sold losing positions in December to realise tax losses, depressing small-cap prices, then bought back in January. That is a genuine mechanism with a plausible effect on prices.
The effect has weakened substantially since it was documented in the 1970s and 1980s. That is the expected fate of a published anomaly with a known cause: participants front-run it until the edge is gone.
It remains a useful case study in how anomalies behave. A pattern with a real mechanism can still disappear once enough capital knows about it, which is a reason to be sceptical of any widely publicised seasonal edge.
Original diagrams for the ideas on this page. Illustrative, not real market data.
Expectancy: the average trade. Forty trades sorted by outcome: 24 small losses and 16 larger wins. Weighting each side by how often it happens gives the average result per trade, marked here by the dashed line at +$120.
Educational only, not advice. Spotted an error? Post in Site Feedback.