Strategy: January effect portfolios

In this report we publish our recommended OSEBX and OSEAX portfolios of stocks for investors looking to profit from the curiously reliable ‘January effect’ anomaly. The OSEBX portfolio is heavily skewed towards the small-cap IT sector, with Energy also over-represented. The OSEAX portfolio is dominated by small Energy names. The ‘January effect’ has been a remarkably reliable trading rule. In theory, well-known market anomalies should be arbitraged away over time, but that has not been the case with the January effect in Norway. While there are various approaches to capitalising on the January effect, our methodology aims to replicate the strategy academic literature has found to be most reliable by selecting the 10 weakest performers YTD on a purely quantitative basis. This has provided positive returns in 16 of the past 17 years. Our back-testing has found that the optimal period for this strategy is from the middle of December until the fifth trading day in January. The market has not followed the normal seasonal pattern this year. Historically, the vast majority of annual equity returns for the OSEBX has come during the first four months of the year and the last six weeks of the year. This year, virtually all of the returns have come during the period that has historically provided the weakest performance. If this abnormal seasonal pattern continues, it could imply modest returns for the January effect strategy this year. OSEBX portfolio. The OSEBX portfolio is skewed towards the IT sector, with four constituents compared with an OSEBX index weight of 3%. Energy has three representatives. The portfolio contains: Seadrill, Next Biometrics, PGS, PhotoCure, Norwegian Air Shuttle, Opera, Thin Film, Frontline, Veidekke and Link Mobility. OSEAX portfolio. The OSEAX’s weakest performers YTD are dominated by small-cap Energy stocks. As a result, these suggestions are both very high-risk and in many cases have limited daily trading volume. We would recommend extreme caution before acting on these suggestions.