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To: Herm who wrote (5883)	11/17/1997 8:52:00 PM
From: Herm	Read Replies (4) \| Respond to of 14162

More on The January Effect by IBD. January Effect: Small Caps' Little Booster Small Stocks Beat S&P 500 In 40 Of Past 45 First Months Date: 11/17/97 Author: Adam Shell Meteorologists have El Nino. Climatologists have the greenhouse effect. Wall Street technicians have the ''January effect.'' Don't panic - the January effect isn't some apocalyptic market- crash scenario. Just the opposite: It's a phrase describing the tendency of small stocks to outperform large-cap stocks in January. We're not talking about puny gains. Take '91 and '92. Tiny stocks, as measured by the S&P Low-Priced index, beat their S&P 500 cousins in January by more than 16 percentage points. So says a study by Yale Hirsch's Stock Trader's Almanac in Old Tappan, N.J. The average difference since '53: 5.2 percentage points. The S&P 500 has bucked the trend the past two years, edging out small stocks in '96 and '97. But since '53, the S&P has beaten small stocks in January only five times. Why is January so special? The sudden surge stems from a rebound in smaller names hit by late-year tax selling and portfolio window-dressing. Fearful of missing out on big gains, investors in recent years have been pouring cash into small-stock funds as early as mid-October. ''It's been starting earlier and earlier,'' said David Petersen, president of Financial Services Advisory in Silver Spring, Md. That bet has paid off. The January effect now kicks in before New Year's Eve. December, too, should be proclaimed small-cap fund month. Why? Mutual funds investing in small caps beat the S&P 500 in December five out of the last six years, says Morningstar Inc. Will it work this winter? Despite all the doom and gloom in the market, stocks are showing signs of life. Last Thursday, both the Dow and the Nasdaq gained more than 1% on expanding volume. That may signal an upward trend in the market. More Good News There's more good news. Mark Hulbert, editor of Alexandria, Va.-based Hulbert Financial Digest, which tracks investment newsletters, says he hasn't spotted any stories yet about the January effect. And Petersen, who tracks 2,000 funds daily, says he hasn't seen much buying. That lack of awareness could give decisive investors a jump-start on the pack. ''If you're going to be investing in equities, don't wait until February -you should be in by December,'' said Stephen Janachowski, a Tiburon, Calif.-based investment adviser. Some market watchers are more cautious. This year's rally may not appear, says Josef Lakonishok, co-author of the ''The Incredible January Effect: The Stock Market's Unsolved Mystery.'' He blames market volatility. What direction small stocks are headed is anyone's guess, Lakonishok says. Unlike past years, he wouldn't offer any tips on how to benefit from the January effect. ''I'd hate to tell investors to move money from Treasuries or money markets into small-stock funds,'' he said. ''It's not a cheap market.'' Few Options But for folks confident the January effect is on, there are a few ways to play it. History shows that the small stocks punished the most in year- end selling are the ones that bounce back the most. A logical starting point, then, would be to look at small-cap value funds rated A- or better by IBD. They've all delivered solid returns. If you're already invested, consider shifting some profits into small-cap value funds. But watch your timing here. Any fund that pays out big year-end capital gains could bring a big tax bill for you. So you might want to delay your purchases until the payout, unless your money is in tax-sheltered retirement accounts. Petersen says he'll start purchasing shares the second he senses the market is back in an upward trend. Investors can gauge buying momentum by tracking various indexes. Chart-watching may help you spot which type of small-cap fund - micro-cap, value or growth - will bounce back first. So what type of fund should you buy? ''I'd look for emerging-growth funds that are pretty disciplined in buying earnings on the cheap,'' Janachowski said. -------------------------------------------------------------------------------- (C) Copyright 1997 Investors Business Daily, Inc.