The 52-Week High And The January Effect

Abstract

The predictive power of past returns for January reversal is compared with that of the nearness of current prices to the 52-week high.  When compared jointly, past returns lose their forecasting power for January returns and the nearness of current prices to the 52-week high assumes the dominant role in explaining the January reversal.  This suggests that tax-loss selling is not the primary factor explaining the January effect.  A behavioral explanation consistent with the window-dressing argument is proposed in that the 52-week high acts as an “anchor,” a highly visible reference price to fund holders, increasing fund managers’ incentives to window-dress by temporarily adding (removing) stocks that are perceived by fund holders as good (bad) investments, based on the nearness of these stocks’ current prices to the 52-week high.