The January Effect Is Back

Well lets hope so! The January Effect is a term investors use to refer to the stock  market gains that have been traditionally seen in the month of January. The January Effect focuses on small cap stocks outperforming. The theory is that many investors sell there small cap stocks in December to take advantage of tax loss selling for the year end. Come January they are ready to put that money back to work and begin to reinvest it again. The theory is thought to be particularly effective after a bad year where many investors have losses.

History does back up the theory to some extent as January has returned about a average of 1.7% dating back to 1926. January historically ranks in the top 3 in terms of months with the best percentage gains.

There is however another thing we should all watch for during this first month of the year. The January Barometer is followed closely by many seasoned investors. The theory is that however January goes will indicate how the rest of the year will be. In other words a positive January means a positive year and vice versa. The statistics say that historically the January Barometer is right over 70% of the time.