January effect

January effect

The January effect (sometimes called "year-end effect") is a calendar effect wherein stocks, especially small-cap stocks, have historically tended to rise markedly in price during the period starting on the last day of December and ending on the fifth trading day of January. This effect is owed to year-end selling to create tax losses, recognize capital gains, effect portfolio window dressing, or raise holiday cash. Because such selling depresses the stocks but has nothing to do with their fundamental worth, bargain hunters quickly buy in, causing the January rally. This phenomenon is described in Robert Haugen's text, "The Incredible January Effect".

The strength of the effect varies depending on company size and other factors.

In the last couple of years, after the January effect became widely known to the public, it has become less pronounced and has started shifting to December causing a rise in stock prices, known as a Santa Claus rally and the December Effect.

See also

* Halloween indicator
* Mark Twain effect
* Stock market cycles


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