The January Effect – Will This January Generate Abnormal Returns As Well?

The January effect is one of a series of known ‘market failures’. We assume the stock market to be efficient with regards to publicly available information. However, in some instances one is able to generate abnormal return using a publicly known phenomenon. The January effect is one such phenomenon.

Some studies have shown stocks generate abnormal returns in January when compared to other months of the year. These studies have also shown that:

1. The first days of January are mostly responsible for this effect.
2. Companies with lower market values generate greater abnormal returns.

This phenomenon can also be phrased as following: The majority of abnormal returns generated by companies with lower market value are happens in January.

The most common explanations are:
1. Tax considerations – After realizing loss for tax purposes in December investor hurry and buy back the stocks sold.
2. This phenomenon is more common is lower market cap companies as each transaction has more effect.

January is also considered a sort of proxy for the entire year. It appears, according to Globes.com, that since 1950's out of the 36 times the first 5 days of January ended positively 31 years have also generated positive results (The remaining 21 times the first 5 days of January ended negatively 11 years ended positively and 10 ended negatively).

So, will we see the January effect in 2008? We’ll know in a few days. Many speculations are available as markets are sensitive and edgy.

More on the January Effect:
1. The January Effect – 2007 @ Trader’s Narrative
2. 15 January Effect Stocks Trading Ideas 2007-08 @ Alpha Trends
3. Two January Effect Stocks @ BloggingStocks
4. January Effect Trading Opportunities in Financials @ Seeking Alpha