Can you capitalize on the turn-of-the-year effect?

Previous research identifies evidence of a strong seasonal pattern in returns, whereby returns are systematically higher in January. The most widely advanced explanation for this turn-of-the-year (or January) effect relies on tax-based trading; however, researchers have proposed a variety of alternative explanations. The relevance of the January effect for investors has been questioned due to the inconsistency in the phenomenon. We find evidence indicating that a strategy that targets small, out-of-favour stocks allows investors to achieve superior performance in January. Furthermore, we find that market indicators can be used to improve the consistency of the strategy. Finally, we advance a theory to explain the observed superior performance of the proposed investment strategy.