Kavan Choksi Explains the Myth of the January Effect January has been a magical month for stock market investors in the past - but is it as amazing as people make out? Kavan Choksi takes an insightful look at its long-standing reputation to cut through the hype and uncover what's behind the myth of the January Effect.
Many investors are familiar with the "January Effect," a common belief that stocks rise more than any other month during January. What is the driving force behind this phenomenon? Tax-related selling in December at the end of the previous year, followed by reinvesting in stock markets come Jan 1st.
Kavan Choksi says that the January Effect is sometimes an anomaly observed in the market. During this period, stock prices, especially the ones of small-cap companies, increased slightly during January compared to any other month of the year.
For some traders, the January Effect is reliable as a "calendar effect." To them, it is not a myth and can be used for trading opportunities. It is a chance to purchase stocks at a low price before selling them during or after the January Effect has taken place, taking in profits.
Some traders may consider the January Effect when buying or selling stocks around that time of the year.
Throughout the history of stocks, the January Effect is observable in most years. However, the fluctuations are much more subtle now than in the mid-20th century, when it was first observed. There have been years where there were moderate declines in stocks in January. That said, sharp declines are not common, Kavan Choksi adds.
Investors considering investing because of the January Effect should practice caution. The January Effect is just a theory -- much like the Santa Claus Rally. Nobody knows for certain why they happen. Nobody can even predict if they'll happen.
Believe it or not, calendar theories may appear predictive at first glance — but they don't accurately forecast market behavior. In other words: if you put your faith in them, Kavan Choksi warns that the cost could be substantial. Kavan Choksi is a business management consultant who shares his insights on business, finance, and economics on his blogs. Access the posts here .