If you're familiar with the stock market then you're probably aware of the January Effect. It represents the time each year - in January - when stocks usually go up in price. Savvy investors who anticipate this annual effect usually make choices like holding or selling at specific times to avoid losing money.
The only problem is that it seems that the January Effect may have actually come a little early this year. So for those who were ready to make their choices, you may have to make different decisions than originally planned.
The Basics of the January Effect
In general, the January Effect occurs when there is an increase in the purchase of stock shares. The increase usually rides on the coattails of a drop in price that occurs in December after investors sell off their shares to create tax losses that will offset their capital gains. In the first week of January, when the tax year has passed, investors buy stock to reinvest their money in the market, causing prices to rise.
Often, smaller companies outperform larger companies during this time because so many investors are selling stocks for larger losses. According to historical data, this occurred nearly 70 times from 1925 to 1993. So in addition to looking at smaller companies for investment during this time, some suggest making your investing stock purchases in December then holding them until they rise in January to make the most of the market ups and downs.
Did This Year's January Effect Already Start?
The January Effect has become an age-old occurrence that allows analysts to predict it with relative accuracy each year, even without help of technical analysis, though it is always used. In the past, the technical analysis for this trend has been relatively accurate; however, it seems that this year's pattern may have been thrown off a bit.
Some analysts are now predicting that this year's January Effect may have started actually earlier. In other words, the drop in shares may have hit us before December - possibly in October.
From the record of the S&P 500, the numbers dropped from 1097 on Oct. 19 to 1036 on Oct. 30 and that seemed to be the lowest low. On Nov. 1, the S&P rose and since then the lowest low we've seen was on Nov. 13 when it dropped from a peak of 1104 to a low of 1086. On Dec. 9, the index hit 1087, but it has definitely had more ups than downs, including an impressive jump to 1117 on Dec. 4.
It appears that we may have reached the incline phase of the January Effect and experts predict that the incline may likely continue into the New Year. Why? Partially because no portfolio managers are eager to stop their stock trading at this point and lose the potential of a major year-end bonus. Why fix something that doesn't appear to be broken?
What This Means for You
Now it's your job as a savvy investor to decide how to buy stocks during this interesting time. You may be interested in selling off your shares at year's end like you have in previous years, but feel a bit strange about selling off if stocks are still increasing. The temptation to hold on may be strong.
And if you were thinking about buying while they were low, you may feel a bit flustered by the thought that the timeframe to buy may have come and gone. Of course, the stock prices have been undoubtedly shaky, so while it appears prices are rising or, at the very least, holding steady, they could still drop - December isn't over yet.
Since the trend doesn't appear to be following previous years (except for a few years like 1982, 1989 and 2008 where small stocks underperformed large stocks), it may be a good idea to sit back and watch - and of course consult your portfolio manager - before making your January Effect decision this year.
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Are you holding onto your stocks or selling them off like usual?
