January Effect

January effect

Refers to the historical pattern that stock prices rise in the first few days of January. Studies have suggested this holds only for small-capitalization stocks. In recent years, there is less evidence of a January effect.

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January effect

The tendency of stocks to perform better in January than at any other time of the year. Some analysts speculate that the stock market tends to become oversold in December when investors sell to establish losses for tax purposes or to obtain money for holiday spending.

Case Study One investment strategy that uses stock index futures or stock index options to profit from the January effect assumes that equities of small firms continue to outperform equities of large firms during the early part of each calendar year. Using this strategy, an investor could take advantage of the higher returns offered by small-caps by purchasing options or futures on the Value Line Composite Index, which includes more than 1,700 stocks, and simultaneously selling options or futures on a blue chip index such as the S&P 500 or the Major Market Index. This spread should produce a profit regardless of an increase or decrease in the overall market so long as small-caps outperforms large-caps. This same spread will be a losing investment if the January effect doesn't hold and small-caps underperforms large-caps.

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January Effect. Each year, the stock market tends to increase slightly in value between December 31 and the end of the first week of January.

Known as the January effect, this rise starts when investors sell underperforming stocks at year-end to claim capital losses on their tax returns.

After the new tax year begins on January 1, the same investors tend to reinvest the money from those sales, heightening demand temporarily, and making the overall market rise slightly during that week.