Will There Be a Strong January Effect This Year?

Will There Be a Strong January Effect This Year?

The January Effect has been felt many years and, while it is studied as a trend, its impact isn’t considered to be a strong as it used to be.

January is considered a great time to start stock trading. It’s when you start your quest to fulfil all your trading objectives, and advanced online stock brokers can help you here.

An Introduction to the January Effect

If you’re new to stock trading, you probably haven’t heard of the January Effect. As per Investopedia analyst James Chen, the January Effect refers to a stock price rise that traditionally occurs in January, particularly for small-cap stocks. This normally occurs following a price drop that usually occurs in December.

Explanations for the January Effect

One explanation for this is that in December, you have investors instigating a sell-off as part of tax-loss harvesting for counterbalancing realized capital gains. There’s also another possible explanation for the January buying spree. Investors could be using the cash bonuses at the end of the previous year to buy stocks in the following month.

The other explanation for January Effect is obviously investor psychology. This is the result of investors having probably made New Year resolutions the previous year with regard to investing and then considering January to be the best month to put that strategy into effect and get started by investing. Indeed, this strategy of buying in January is also recommended by many analysts.

The sell-offs at the end of the previous year also manage to attract buyers looking for stocks selling for the lower prices, with the awareness that these price dips at the end of the previous year are not the effect of company fundamentals. This causes prices to rise in January.

How Often Has the January Effect Been Felt?

The January Effect is something that has been experienced for 62% of the time till 2018 right from 1928 as a rise in stock prices in the month. So can we expect the same this year?

A study that analyzed data right from 1904 all the way to 1974 found that the month of January had an average stock return 5 timesmore than in any other month in the year, particularly with regard to small-cap stocks. Another study that analyzed data from the period 1972 to 2002 revealed that the Russell 2000 index stocks, which are small-cap stocks, outperformed Russell 1000 index stocks, which are large-cap stocks, in January. These stocks outperformed by 0.82%, though, for the rest of the year they underperformed.

The Reduced Impact of January Effect

Such data also suggests that the impact of the January Effect is becoming less significant. One analyst quoted by Investopedia reckons that the January Effect is basically one of the “seasonal anomalies” and does not necessarily give investors any reliable profit opportunities. He also suggests that the transaction costs needed to benefit from such an anomaly actually render it unprofitable. Besides, a great number of people time their moves for this effect, to the point that it gets priced to the market as well, which nullifies its effect.

However, one analyst from InvestorPlace believes that the January Effect is something you need to be wary of if you own Microsoft ($MSFT) stock. Otherwise, the general viewpoint among the trading audience is to get started with your strategy right from the beginning of the year. With advanced stock market trading software and features such as commission free trading, you can get started when you like.

 

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