The November Effect [WSJ]
AHEAD OF THE TAPE
By JUSTIN LAHART
November 27, 2006; Page C1
In the stock market, the last shall be first -- at least for a few more days.
Some of November's biggest winners in the stock market were having a horrible year until the month started, while some of the year's best picks have been having a tougher time this month. Shares of semiconductor maker PMC-Sierra, for example, were down 14% for the year at the end of October, but have risen 17.4% since then. Meantime, AT&T, which was up 39.9% at the end of October, is down 4.6% this month.
These aren't isolated incidents, says Paul Bukowski, who runs the quantitative-strategy group at Hartford Investment Management. He divided the performance of stocks in the Russell 1000-stock index into fifths and found that stocks with the strongest 11-month moves through the end of September underperformed stocks with the weakest moves by 1.5 percentage points in the first half of November. (For technical reasons, it's standard practice to drop the last month -- in this case October -- when analyzing price momentum.)
Over the past 16 years, stock-market winners have tended to fare worse than losers in November, underperforming, on average, by more than three percentage points. Mr. Bukowski found this trend remained intact regardless of a stock's sector or size, and regardless of whether it was a growth or value play. In other words, the best distinguishing characteristic of the stocks that did best in November was that they hadn't been doing very well until that point.
One reason for the November effect is that many mutual funds close their fiscal years on Oct. 31. Because they're required to distribute most of their realized capital gains and dividend income, many funds sell their worst-performing shares in October to offset those gains, lowering the tax burden of investors in the funds. They may also sell losers to make their holdings look more impressive to investors -- something known as window-dressing.
In November, the downward pressure eases and those stocks pop. It's similar to the January effect, during which year-end tax-loss candidates bounce in the beginning of the new year. The November effect has been more powerful than the January effect lately, says Mr. Bukowski, probably because the January effect is more widely known and traders front-run it more actively.
In December, meanwhile, the trend reverses again, with winners tending to outperform the losers by better than three percentage points. In other words, prepare for a break in underdog season. Timing is everything.
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