Sunday, January 3, 2010

January effect in stock markets

The first month of the year are in mature markets traditionally profitable. The definition talks of so-called "January effect".

Behind the January effect is a simple historical fact that investors in the United States sell equities at the end of the year for tax purposes. In January they buy back into their portfolios, thus helping to stronger growth in the major stock indexes.

Pragmatic view of the January effect, however, speaks of the traditional large influx of new money in mutual and hedge funds which are reflected in new stock purchases.

There is another relation connected with January effect. History says that when January ends in the black (note the positive value) is nearly 75% chance that the whole year ends up with positive return.

The picture above shows average return for each month during the period from 1927 till 2001. It is an indicator for some seasonal trading strategies. As you can see January is undoubtedly the best month of the year. But for example last two years didn't confirm the seasonality. Two years ago it was just beginning of the bear market and year ago continuing selling pressure in global recession.


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