There is a Wall Street saying: “As goes January, so goes the year.” There is a merit in this. We may end the year higher.

At the beginning of every year you must have noticed that investors, market analysts, policy makers often debate the future of the market and come up with various theories - some interesting, some wild and some way too ridiculous – to predict whether our market is likely to end positive or negative. We decided to dig up some numbers, purely based on facts and have come up some very interesting findings.

Over the last 20 years of data, there has been a pattern which we not only notice in Indian markets but also the world over. The pattern which we call “January Effect” seemed to decide the fate of the markets at the end of the year. When the markets close positively at the end of January, and subsequently the year ends on a positive note as well, we call it the “January Effect”.

This is the first instance since 2007 that our markets have closed in the black in the month of January. Not only did the BSE Sensex close positively, but all major indices has ended positive as well. Will the close be positive for this year too? If history is any indicator, which, of course, must be treated with some scepticism, there might be good chance that this year might end on a positive note.



Let us take a look at our findings. Over the last 21 years, the BSE Sensex, during January, has been up 10 times and down 11 times. However, out of the 10 years it closed positively, the year eventually ended up on a positive note 80% of the time. In fact, the only years that the “January Effect” didn’t seem to conform were during the 2000-2002 period, when our markets were hit by the Ketan Parekh scam and the global dot-com meltdown.

If we look at the other side of the coin - the years markets closed negative in the month of January - the outcome was random - it was up 6 times while it fell 5 times. You would have been better off tossing a coin.

Take a look at the global markets over the last 21 years. The chart below depicts how closely the markets at the end of the year mirrors with how the markets close in January. In the past 21 years, the Chinese market (Shanghai Composite) ended up positive 11 times at the end of January. On 9 out these 11 occasions, a high correlation of 81%, the market closed positive at the end of the year.

NASDAQ and Dow had the same story to tell. In these markets, the yearend outcome closely followed that of January -- 78% and a whopping 92% respectively. Conversely, on 8 occasions when Dow was down in January, it ended higher 50% of the time – totally random.

During the last 21 years, when DAX, the German index, ended positive in January, it ended the year higher 75% of the time. Hang Seng closed up 77% of the time, while in case of FTSE the correlation was as high as 80%.

An emerging market like Mexico exhibited similar behaviour as well. The markets ended up on the positive note 80% of the time when the January was positive.

But if January delivers a big return, is anything left for the rest of the year? Interestingly, a positive January seemed to have a positive ripple effect throughout the year. For instance, out of 10 times BSE Sensex ended positive in January, the remaining 11 months continued to stay positive and delivered returns greater than January 50% of the time. Similar conclusions can be said of other indices as well. In case of Nasdaq the remaining 11 months delivered greater returns than January 10 out of 14 times, while Hang Seng had 7 out of 9 times where remaining 11 months trumped January’s; DAX’s ratio was 75%.