January effect is a calendar-related anomaly in the financial market where stock prices increase in the month of January. The main characteristics of the January Effect are an increase in buying securities before the end of the year for a lower price, and selling them in January to generate profit from the price differences.
The January effect occurs for two reasons.
- Sell stocks for tax reasons at year end – investors sell losing stocks prior to the year end to take capital losses on their tax returns. The tax selling further lowers the prices of the stocks that are big losers for the year.
- In January Wall Street professionals get big bonuses. Those with big bonus prefer bargain stocks and drive up the prices of the stocks that were losers the previous year.
According to Nigam Arora, as the phenomenon has become well known, the time to buy is in November. Thirty years ago, it was the last week of December. In addition, the conventional wisdom is that this effect applies only to small stocks. However, his experience is that the effect is not limited to small stocks but applies to depressed stocks in general.
Reference: MarketWatch, 2011-11-11, “Act now to profit from the January Effect”