At Hand Once Again: The Season to Consider the January Effect

With the market approaching the last quarter of the year, one of the most widely discussed anomalies of the stock market, the January effect, is once again fast approaching. While just how useful the January effect is for the individual investor will probably remain hotly debated in some quarters, my own work as well as other studies show that the January effect, if taken in the proper context, is a factor that investors can and should exploit.

First, the January effect is primarily a low price effect. While the market in general is influenced to some degree, the January effect is most evident in low-priced stocks, with low-priced stocks in January chalking up gains four times the overall market. Keep in mind that we’re not talking about small market capitalization (stock price times number of shares outstanding) stocks, but low-priced stocks—stocks priced at $20, $15, $10, $5 and under.

Second, the January effect is most prominent in markets that follow down markets. Since tax-loss selling and portfolio “house-cleaning” by both individual and professional investors are the most likely explanations of the January effect, it stands to reason that the number of stocks enjoying the January effect rise would be greater in markets following down years.

With the market in 1994 showing one of its most important declines in four years, and with the Dow down some 350 points and the S&P 500 down nearly 10%, the declines in individual stocks have been pretty hefty. There are some fairly well-known stocks down 50% or more and selling at very low prices.

Third, while the name implies a “January effect,” and many stocks do rise the sharpest in January, there is more to the January effect than just the month of January. Some stocks show their sharpest gains, for instance, in February, some in March, and so forth. Each stock has to be taken on a case-by-case basis.

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