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How To Benefit And Profit From “January Stock Effect”

January_effectAs the end of the year comes, this is a great time to tell you about an interesting phenomena in the stock markets which is called the ‘January Effect’.

This is an interesting opportunity to take a look at the results of last year and prepare yourself for new year 2014.

There are many theories and debates why and how this happens. In this article I’ll briefly explain what “january stock effect” is, why does it happen and show you a few examples from 2013 trading.
What is the January Effect?

A recurring trend in the stock market during January (mostly the first part of the month) wherein stock prices tend to go up


Why does this happen?

Towards the end of the year many investors sell-off their stock, in order to adjust gains and/or to lower the total yearly profits in order to reduce the amount of capital gains tax. This massive stocks sell-off creates a big price drop, but as the sellers buy back the stock and the volume increases, the stock price tends to recover and even surpass the initial price level.

When does this happen?

To profit from this phenomenon you need a correct timing which changes from year to year, but the price rally usually begins towards the end of the year and continues in January. The peak is usually around mid-January, but it can last even longer. In order to find the correct entry point, you need to look for rising market volumes and volatility increase.

Examples from last year

The big and very popular stocks are less affected by this effect, but take a look at stocks that hold a smaller market capital or are less “popular”. Most of the stocks that rised during January in the past are of that kind. Notice that not all stock under this category rose previous years or will rise this January.

For example, although failing to reach positive gains throughout the rest of the year, Urban Outfitters Inc. enjoyed a very nice rally in the month of January 2013. Another interesting stock from the Fashion industry – Ralph Lauren Corporation also enjoyed a cool rally in last January gaining more than 10% in just a couple of days.

Next stock that benefited from “January Effect” in 2013 was NVIDIA Corporation, you can check the price spike on the yearly chart of this stock. Note that this is not guaranteed to happen again in the mentioned stocks, but what you can see in the above examples is that before the January spike  there was a dip in December, so you try to find this pattern in other stocks as this could be a good indicator for a sell-off that could be followed by a price spike.

* Past performance does not guarantee future performance. Notice that the fact the effect occurred last year doesn’t mean it will happen again in the same way this year.

 

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