January effect


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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 Barometer

A theory stating that the performance of the S&P 500 in January predicts its performance for the remainder of the year. That it, if the S&P ends January higher than it began, there will be a rising stock market and vice versa. Investors using the January barometer make investment decisions based on this performance; they buy S&P 500 stocks when performance is strong in January and sell when it is not. The January barometer has had mixed results over the years.

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.

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.

References in periodicals archive ?
[1987] show that the January effect was present from 1871-1913, prior to the introduction of personal income taxes, and that it is not confined to small firms.
The average reached a record high of 3,978.36 on January 31, after experiencing a typical "January effect." However, the Federal open Market Committee triggered an avalanche of sell orders on February 4 when it bumped up short-term interest rates to 3.25%, an increase of 0.25%.
The "January effect" indicates that the stock market goes up significantly in January compared to other months.
Among the most consistent index stocks that have closed positively in eight of the past 10 years during the January effect were BDO, which gained an average returns of 3.1 percent; SM Investments, 3.1 percent and Semirara Coal, 3.7 percent.
Other factors include the expectations of timely elections, rise in crude oil prices, appointment of a new economic team in Islamabad and the January effect. The visit by the minister of state for finance to the PSX on Thursday where he assured members of the exchange's board of his support also helped boost investors' enthusiasm.
Further, Hang and Hirshchy (2006) report that the January effect continues to exist in small-cap stocks.
The January effect exhibits a pronounced declining trend for both large and small firm stock indices for the last few decades and the effect is disappearing in major equity indices of Canada, France, Germany, Japan and United Kingdom.
Various seasonal anomalies in stock returns have been researched since Rozeff and Kinney (1976) originally presented the January effect. (1) For example, French (1980) documented the weekend (or Monday) effect, (2) and Ariel (1987) presented the end-of-month (or monthly) effect.
"Professional Portfolio Managers and the January Effect: Theory and Evidence." Review of Financial Economics, Fall 1994, 4(1), pp.
The last cause for the January Effect may be the most meaningful.
Explanations offered included the impact of holidays, time zone differences, market age and price, January effect and mismeasured risk.