Depending on your experience in the stock market, you may or may not have heard of the January Effect, a Wall Street term given to the general increase in the rise of stocks in January each year. This phenomenon is in general attributed to a sharp increase in buying which usually occurs toward the end of the year in December, when investors quickly offset capital gains and sell their stocks to create tax losses.
However, according to Mark Hulbert of MarketWatch, a highly authoritative financial information website that provides business news, analysis and stock market data, this information should be taken with a pinch of salt. The stock market January Effect is based on research that was conducted so many years ago that many investors of today have forgotten a very important point; that this tendency of stock to strengthen does not apply to the entire stock market.
The January Effect was in fact first recognised way back in the 1940s, but the strength was only quantified by Donald B. Keim in 1982 in a study that utilised stock market records dating back to 1925. Since Keim, various studies into the January Effect have been conducted by market leaders and professionals. Most recently in 2010 the Wall Street Journal reported that from the year 1900 to 2009, the Dow Jones Industrial Average increased by 62% in the period of January, with the Nasdaq Composite Index rising by 67%.
However, before you switch from trading currencies to stocks on your mt4 platform, the trend of more recent years has shown that the January Effect actually starts in December, probably due to increased awareness of the upward trend. According to the broad market measured by the S&P 500, January has actually seen a steady decline in the years 2001-2003, 2005, 2008, 2009 and 2010.Professionals agree, however, that it is in fact small stocks are the biggest contributor to the January effect, and that investors can still make large profits if they fully understand how to take advantage of the January Effect stock market.
Strength after the New Year comes mostly from stocks of comparatively small companies, according to data from Eugene Fame, a finance professor at the University of Chicago, as well as Ken French, a finance professor at Dartmouth. According to their figures, the average return in January from smaller-cap stocks is 7.9% larger compared to the 0.9% average from February to December. Thus to fully take advantage of the January stock market Effect, one needs to do the research and seek small companies to bet on, with market caps below $100 million, that are recommended for purchase by financial services. As well as other stock market and Forex trading tips, view what Mark Hulbert recommends for the January Effect 2012 on MarketWatch.
Penny Munroe is an avid writer in Forex news and tips from around the world and aims to educate her readers in the skills of succesful trading.