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This belief has some relevance if you note that the January barometer, which is the indicator that suggests that the stock market performance in the month of January dictates the overall year’s returns, has actually been accurate 80% to 91% of the time since 1950.
Another interesting note is that the January effect has become more minimized in recent times due to the fact that more investors are aware of this phenomenon.
It is also typically noted by the financial community and reported by the media as one of those occurrences that sets the tone for the rest of the year. I was quite glad for the January Effect because it was one of those things that gave me some encouragement about staying invested and keeping on an investment program. Trying to second-guess the market is pure folly that has driven more than one poor investor to the wall! Finally, what about January Effect #3, that small-cap stocks outperform large-cap stocks in January? First, there are indeed anomalies in the stock market, due to the effects of tax laws, the way earnings are reported by major corporations, seasonality in consumer and business spending habits, etc.
Always remember that behind all markets are human beings who buy and sell for a variety of reasons. Investment U Disclaimer: Nothing published by Investment U should be considered personalized investment advice.
Therefore, the main characteristics of the January Effect are an increase in buying securities before the end of the year for a lower price, and selling them in January to generate profit from the price differences. This type of pattern in price behavior on the financial market supports the fact that financial markets are not fully efficient. The most common theory explaining this phenomenon is that individual investors, who are income tax-sensitive and who disproportionately hold small stocks, sell stocks for tax reasons at year end (such as to claim a capital loss) and reinvest after the first of the year. Further theoretical explanation of the January effect, and it’s corollary small-cap outperformance observation, is that retail investors who are tax sensitive choose to take capital losses during the month of December, and then after the 30 day wash rule waiting period buy the stocks back in January. The real question is whether buyers and sellers in aggregate foresee enough economic challenges coming to warrant selling early next year.
We still are dedicated to three steadfast rules of rebuilding your net-worth that we have now been chanting for six months. This entry was posted in US Economy and tagged january effect, Stock Market Analysis on January 11, 2010 by StockNod. The January Effect is named for the fact that monthly performance in January has been overwhelming positive. Furthermore, the effect has been said to have a more pronounced effect on small cap stocks, which arguably are more susceptible to mispricing during periods of significant selling and buying that can benefit investors.
From 1951 to 2011, the S&P 500 had a positive return in January roughly 63% of the time.
Nevertheless, there are possibly some small Cap ETFs that may outperform the broad based index if underlying reasoning behind small cap outperformance holds true. I am certainly not in a position to speculate on a theory, especially with the vacillating nature of markets that we’ve seen in the last several months.

Recent CommentsUlli Niemann on Markets Higher, But Speculation Still RemainsSmokey on Markets Higher, But Speculation Still Remainsjmh6 on One Man’s Opinion: Lather. On average, there are three months where stocks perform consistently well on Wall Street - January, April and December. Most of the time, this is true, but only because historically stocks have been in a long-term bullish trend over the past 100 years, so January is likely to be a rising month, too. Examples: In 2000, January was bullish, but the markets, especially the Nasdaq, tanked starting in April.
At first, only a few insiders recognized that the 10 highest-yielding Dow stocks outperformed the market indexes. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation.
The January effect does not always materialize; for example, small stocks underperformed large stocks in January 1982, 1987, 1989, 1990, and 2008. Further interpretation suggests \that the selling pressure on small stocks from tax selling creates buying opportunities in these “sold off” stocks that is taken advantage of in January. Will this group start a correction early in 2010, or will the continued march of a self-sustaining economic recovery keep them locked into stocks as they recognize that we are still very early in a new market cycle. We believe that those that follow these rules will look back in five years with great satisfaction at their decisions.
Further interpretation suggests that the selling pressure on small stocks from tax selling creates buying opportunities in these “sold off” stocks that is taken advantage of in January. But looking at the short-term, some investors look forward to this time of the year because of the January Effect, an apparent anomaly that questions the efficient market hypothesis. This has primarily been attributed to large stock sell-offs in December for tax purposes, thus resulting in appreciation when investors flock in to buy stock in the New Year.
For example, since 1926, small caps have outperformed large caps in January over 70% of the time. And as investors catch onto this “inefficiency,” especially once you add high frequency traders into the mix, reaping the benefits becomes increasingly difficult since there are more market participants aware of the effect.
However, one can see below that as of late, the index has had some rough starts to the year.
Though these types of strategies may be tempting, they don’t fall in line with my investment philosophy. Despite literature suggesting an advantage in January, we can’t use the past as an accurate indicator for current market behavior, which represents a unique set of circumstances. Here Are Some Answers.Over the last few years I have received over 350 questions and answered about everything from ETF investing to various investment strategies.
According to Jeremy Siegel's classic work, Stocks for the Long Run, small stocks have outperformed large stocks 80% of the time (2nd edition, p. If everyone becomes aware of the January Effect, it will lead to investors buying early - hence the Santa Claus Rally.

Thus, there can never be a "sure deal" in investing or a "perfect" investment over the long run. But then somebody published a bestselling book about this technique, and then all the major brokerage firms started offering "Dogs of the Dow" managed accounts. No communication by our employees to you should be deemed as personalized investment advice. In any event, over the last 85 years most years do record a first half January outperformance of small cap stocks. This year only those that have held stocks through the market cycle still have losses to take.
Trying to guess where that window of opportunity will arrive is a fruitless, treacherous endeavor. And I would advise others not to do the same, especially once transaction costs and tax implications are taken into effect. Then, starting in 2000, small stocks returned to form, winning the race three out of five times (2001, 2004, and 2005).
Too many people find out about the "sure deal," and when they smell money, above-average returns turn into below-average returns.
We expressly forbid our writers from having a financial interest in their own securities recommendations to readers.
Those long term investor are most likely heartened by the performance of their stocks since March and therefore probably will not sell them to take significantly smaller losses than they had on paper a year ago.
Maybe you’ll find answers to questions you have or you might even find questions you hadn’t thought of asking. Obviously, there's no guarantee or high percentage that 2006 will live up the January Effect #3. All of our employees and agents must wait 24 hours after on-line publication or 72 hours after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Investment U should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.
However, if they see a big correction start they may want to sell early next year to lock in profits that they won’t pay tax on until April of 2011.
You may wonder how the wave of selling here can trigger the January effect — well it does, if you consider that bargain hunters are waiting in the wings to pounce upon stocks that have eroded in price due to seasonal events.

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