You folks are engaging in the great un-American (Canadian) pastime of complaining about the weather.
HERE'S the other kind of January effect:
THE JANUARY EFFECT
What exactly is the January effect? Will it be an influence in the market this year? And if so, how
can investors capitalize on it? Simply put, the January effect is the tendency of small stocks to
outperform larger, blue chip issues at the end of one year and into January of the following year.
January effect research does not suggest the markets will trend upward in January. What the
research does say is particularly in January, small stocks tend to outperform large stocks whether
the general market trend is up or down. Over the years, small stocks have made their biggest move
relative to big stocks in the December to January time period. Not all analysts subscribe to the
theory that there is a January effect. Those who do recognize it as a stock market anomaly,
frequently differ in their ideas on its causes and whether it will continue. Still, investors may want
to take into account the possibility of a January effect when considering investment opportunities.
Various studies have found a typical gain nearly one-third of its yearly return during the month of
January. That works out to be about four times what would be expected if returns were evenly
distributed. Stocks of small firms seem to be particularly influenced by this tendency. Returns for
small-cap stocks can be as dramatic as 10 to 12 times higher than the returns of large company
stocks.
A number of theories have arisen about what might cause the January effect. These theories
include the following:
End of the year tax-loss selling pressures small cap stocks and creates a buyer's market in January.
Secondaries come under pressure at the end of the year from "window dressing" –a tendency by
portfolio managers to "clean out" the stock of smaller, lesser known companies from portfolios for
reporting purposes. Then the stocks are repurchased after the reporting year-ends.
Renewed interest in buying stocks occurs after the holidays. Investors look for stocks they
consider to be underpriced. Studies have shown that a high percentage of small stocks tend to be
underpriced.
Additional funds come into the market during January as the new year brings investment dollars
from IRA's and pension plans.
***January is typically a strong month for mutual-fund inflows, while initial public offerings and
overall stock issuance is light. Historically, stock-price movements in January have been a strong
predictor for prices during the rest of the year. Since 1950, this so-called January Effect has proved
predictive in 42 out of 47 years. The most recent losing January came in 1990, which also was the
last down year for the Dow. Only one very good year, 1982 followed a January decline, according
to Yale Hirsch, who tracks the January indicator in the Stock Trader's Almanac. Tom Glavin, the
equity strategist at Deutsche Morgan Grenfell, says the market has gone up an average of 18.2% in
years in which January's returns on stocks were positive, and just 3.3% in years when the month
was a downer.
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