January effect financial definition of January effect. January effect finance term by the Free Online Dictionary.

January Effect

A phenomenon occurring at the end of the year when investors, starting to worry about taxes, sell some stocks that are down so the losses can be written off against capital gains. This selling causes stocks to go down near the end of the year and back up in January when investors buy back the stocks they sold.

Notes:

The January effect is said to affect small-caps more than mid/large caps. The January effect phenomenon, however, has not occurred in years because the markets have adjusted for the effect.

Another reason the January effect is considered a non-event is that more people are using tax sheltered retirement plans and therefore have no reason to sell at the end of the year for a tax loss.

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.

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.