Since 1994, February has churned out average gains of less than 1%.

The most noticeable feature of February is a reversal in January's trend toward gains in "beaten-up" stocks via the "January effect".  In several cases in our tables (1995, 2001, 2002, 2003), stocks that performed well over the last year regained favor, and yearlong losers continued to lose after a January respite. In other cases (1994, 1996, 1998, 1999), though, the January effect spilled over into February.  On average, the tendency for yearlong winners to gain in February is stronger than the tendency for the opposite to occur, and so it ranks amongst our best predictors of February gains.  

It's interesting to note that 1994, 2000, 2001, and 2002 were losing or flat years in the general market, so one might speculate that the likelihood of an abrupt January effect reversal is tied to the previous year's market performance (i.e. a flat or losing year would signal a February reversal of the January effect). We note also that 1995 and 2001 had strong "January effects" (as measured by the gains in stocks that had lost in a big way over the last year)…you might say that the effect was "spent" by the time February rolled around.

The tendency for long term winners to regain momentum is significant in both halves of the month.

Despite the trend toward losses in long-term losers, our tables show that gains are available via purchase of short-term losers.  Choosing stocks that have a low 5 day moving average at the end of January has generated average monthlong gains in excess of 4%.  Most of these gains occur in the first half of the month. Conversely, short-term gains going into February are a predictor of losses.

To try to squeeze the most out of February, you can combine indicators. Combining nice long-term gains with late January losses has netted as much as 10% in February since 1994, with most of that gain coming in the first half of the month...the strategy is quite significant if you don't adjust for risk.  It loses a good deal of its statistical appeal after risk adjustment, though.

Stocks whose late-January volumes exceeded their longer term volumes in a big way fare well in February, particularly in the first half.

Retail stocks fare well in February, coming back from December and January losses.  REIT's, utilities and transportation-related issues are weak.

In tests where we examined stocks that had performed well in previous Februaries for future February gains, we found no special correlation between the two groups.  In fact, the correlation is weakly negative.  However, for intrepid fans of this particular approach to seasonality, we offer the following table of historically strong and weak February stocks:

On the short side, full month strategies that have worked well involve selling long-term losers, volatile stocks, and semiconductors and software stocks.

Buying stocks that lost in a big way on the closing day January is our best strategy for the first half of the month, producing average gains of 2.5% since 1994.  Not far behind is the strategy of purchasing stocks that have had big gains over the course of the last year.  Semiconductors have fared well over this period.

On the short side, stocks that gained nicely toward the end of January, especially on the last day, tend to fare poorly in the first half of the month.  Communications, networking, and computer services are weak.  Stocks that have performed poorly during this period in previous years tend to continue their weakness.

In the second half of the month, biotechs and medical device interests outperform.  Stocks that have taken recent losses should again be avoided.

Looking at S&P 500 data going back to 1985, the trends mentioned above are evident, but the emphasis shifts more to purchase of stocks of relatively low capitalization.  With this group of stocks and this time span, the month has actually been fairly positive...around 2% gains per month.  Bear in mind that the S&P 500 contains only established, "blue-chip" companies to begin with.  The S&P 500 data does not emphasize any particular industry group for the month.  Again, going with yearlong gainers was a strong strategy for the month in our tests, but here the statistical significance was not particularly impressive.

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