Article: Watch for the January Effect

The January Effect is a seasonal upward bounce in the stock market that often occurs between December 31st and the end of the first week in January.  In recent years, the January Effect has slipped forward into December...and has been referred to as the 'Santa Claus Rally'.  As you all know, there wasn't a Santa rally this year.  Will there be a January Effect this year?

During the past 52 years, when the Standard & Poor's 500 index has posted gains during the month of January (34 times), it finished down for the year only three times. The 18 times it fell in January it finished the year down 66% of the time.  History would suggest that the stock market has a better chance of finishing higher in 2003 if it gets off to a fast start.  The January Effect has been attributed to the old saying, 'As January goes, so goes the year'.

Small-cap stocks have provided the best gains during the January Effect.  The January Average return from 1970-1999 (for Small-cap stocks) has been 3.51%.  Not a bad return for 1 month.

The January Effect has been often associated with investors selling-off stocks at the end of the year, so they can write off losses against their capital gains.  Investors put their money back into the market in January, causing a rally.  There isn't any guarantee that a January Effect will occur, and some analysts are now brushing it off as a non-event.  However, it is still another historical occurrence to factor into your trading decisions during the coming week.