March 11, 2011 | In: Opinion
The January Effect in the Stock Market
For those who don’t know, the “January Effect” is a phenonmenon where most stocks surge in the month of January. The January Effect completely fades by the end of January, where investors start looking at the real fundamentals of the stock for trading.
So why do we have the January Effect?
The reason is that in December, most (small) investors start selling their stocks (especially small cap stocks) in order to claim capital losses on their taxes. Investors (sometimes the same investors) start buying the same stocks that they sold again in January, causing more demand and thus upping the price of the stock.
I thought before that the January Effect was a myth, but I can’t think of any stock that I traded at one point or the other (non-ETF) that didn’t go up in January, and this applies across the board (small cap and large cap stocks).
Let’s take a look at some examples…
Bank of America (NYSE:BAC)
Take a look at the chart above, the stock has jumped 85 cents in one day, up 6.3%. By mid January, the stock was up 14% before starting to retreat.
Masco Corporation (NYSE:MAS)
Masco Corporation, the home improvement and building giant, went up 39 cents on January first, or 3%. What’s more interesting is that the stock jumped to $14 on mid January, or up $1.34 (10% from the beginning of the year).
Nvidia Corporation (NYSE:NVDA)
Nvidia jumped more than $4 in just 4 days from the beginning of the year, and closed the month $8.5 higher, or 55% higher!
Think of any stock, that is not an ETF stock, and that didn’t have substantially bad news on January first, and you will see that the January Effect is real, and there’s a potential of making real money from this phenomenon. Here’s a guaranteed tip an investor could use once a year!
Other stocks I can think of at the moment: C, CSCO, AAPL, GOOG. The list is endless!
Note: All images are courtesy of Google finance.