Mar 28, 2011

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The January Effect

January Effect in the Stock Market


First off, Our elite team here at the wants to wish you and your family a Very Healthy & Happy New Year! May 2011 bring you joy, wealth and prosperity all year long.


The January EffectGetting back to business, the StockRunway is pointing to the “the January effect” boosting U.S. stocks as fund managers are no longer engaged in window dressing and focus on stocks they find attractive versus names that have done well for the year. The “the January Effect” is a calendar-related anomaly in the financial market where financial security prices increase in the month of January.We have seen this simple process occur time and time again once the 4th quarter comes to a screeching halt come the end of the calendar year.


It is now time for many select fund managers to act the part of “Stock-Picking” from scratch based on undervalued sectors, forward guiding p/e’s or just plain chart formations rather than the traditional “Buy and Hold” roller coaster ride “hoping” for gains once entering the last quarter of 2010.


The “the January Effect” was first observed in the early 1980s by Donald Keim who, at the time, was a graduate student at the University of Chicago. It is the observed phenomenon that since 1925, smaller stocks have outperformed the broader market in the month of January, with most of the disparity occurring before the middle of the month.


The most common theory explaining this phenomenon is that individual investors, who are income tax sensitive and who disproportionately hold small stocks, sell stocks for tax reasons at year end (such as to claim a capital loss) and reinvest after the first of the year. The January effect does not always materialize; for example, small stocks under-performed large stocks in January 1982, 1987, 1989 and 1990. In fact, some are starting to believe that the “the January Effect” is now considered less important is that more people are using tax-sheltered retirement plans and therefore have no reason to sell at the end of the year for a tax loss.


In summary near year-end, investors, particularly bargain hunters, should be doing their homework and compiling a list of companies with stocks that have been beaten down as a result of tax loss selling or for other reasons but that still have solid fundamentals. That way, when the selling subsides, investors will have the opportunity to book some large profits. Why year-end? Because if you do your research in December, come the new year you stand to profit from the “the January Effect“!


The Editorial Staff @  Until next time. Good Luck Trading and stick to your gameplan!
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