Understanding the January Effect
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The January Effect is another popular market belief or, as some may call it, another superstition, dictating that stocks tend to rise during the first month of the year (and especially strongly during the first week). Out of all the theories as to why it happens, the most popular one remains that investors tend to sell their loosing positions at year end, in order to claim capital loss for tax purposes. As they put the money back in the market in January, however, stocks rise again.
Truly, it’s amazing how the historical trend of stocks moving higher in January has prevailed since 1802, as it’s been documented in “The January Effect” by Mark Haug and Mark Hirschey. Indeed, just to illustrate an example, Nasdaq 100 has encountered January price rises 31/48 times over the course of the month since 1972!
All in all, of course the trend is our friend, and it seems wise to trade the January Effect, but do remember to always keep fundamental analysis in mind when dealing with stocks; just look at this year’s stock prices drop, given tensions in the Middle East.