The idea and the mechanism
Selling driven by tax deadlines is non-economic: investors dump losers in December to book the write-off, pushing prices below fair value for reasons that have nothing to do with the business. In January the artificial pressure lifts and prices snap back. The effect is dead in large caps but persists in the microcap tail — exactly where the arbitrageurs who'd erase it find the names too small to trade.
Orthogonal to the existing vol/trend book, calendar-mechanical, and cheap to test now — a useful pipeline-keeper while the options-data question gets sorted.
The frozen gate
Will be considered to have passed Stage 1 if:
- Mean per-name excess return over equal-weighted microcap baseline during the Dec-Jan window ≥ +2.0pp [suggested, to freeze]
- Hit rate (worst-YTD names outperforming baseline) ≥ 55% [suggested, to freeze]
- Sample size: ≥ 5 Decembers with ≥ 100 names per December (500-1000 events total) — note this is annual-cadence by design [suggested, to freeze]
- Effect present in at least 4 of the 5 Decembers (no single year carrying the result) [suggested, to freeze]
- Welch p<0.05 AND mean>0 on per-event excess return [suggested, to freeze]
- Friction-survival check: mean excess return after applying a microcap round-trip spread of ~150 bps (each leg) must remain ≥ +1.0pp — this is the honest test [suggested, to freeze]
What we expect to find
Effect probably present at the gross level — the academic literature on the January-microcap effect is durable. But the friction-survival check is the entire ballgame: microcap spreads can easily eat 200-400 bps round-trip, which is likely to halve or eliminate the gross edge. Probability of clearing the friction-adjusted gate is moderate-low (~30-40%). Most likely failure mode is exactly what S006 (gap-fade) demonstrated: positive in-sample mean that disappears once realistic transaction costs are applied.
Methodology appendix — gates, exact parameters, look-ahead audit — is visible to subscribers. See the plans →