It's Not Too Early for Investors to Get Ready for the January Effect
“The January effect?” a skeptical reader might question. “I know what the January effect is all about, and besides, it happens in January, not October, so why write about it now?”
While most investors are aware of a January effect, what is not always as well known is that the true January effect is a low-price stock phenomenon. A typically bullish January for the S&P 500 index attests that most stocks benefit to an extent from a January effect—for instance, due to new monies entering the market after the beginning of the year. However, the S&P Low-Priced Stock index’s January gain of four times the S&P 500 index gain attests that the January effect is indeed most pronounced among stocks that are lowest-priced, and usually the most depressed, since the stocks that have sold off the most via tax-selling have the greatest potential for rebound.
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While there have been a number of studies that have validated the fact that the January effect is primarily a low-priced, depressed stock effect (and not, incidentally, a small-cap effect), it also makes common sense.
Another important point is that, although most of the upside action does happen in January, the time to get positioned for the January effect is in October.
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