Click on any image to see the chart of the January Effect in full size.
The January Effect
Below, we’ll take a look at the QQQQ’s for the past decade plus to see the impact of the January Effect on the stock market.
Note the action as you approach year end. It has an impact as you can see profit taking into the new year.
The January Effect is generally the last 3 days of the year and the first two days of the year.
2004 saw a very sharp move higher, especially as we entered the new year. But those gainst were quickly wiped out.
2005 saw a huge rally coming into the year end. But note, the market did revert to the mean, pulling all the way back to the 200dma.
2006 saw a weak December, but a sharp rally to start 2007. There’s a lot of new money that goes to work in the new year.
Theres normally a key reversal date in January, usually around the middle of the month…
It’s funny, as I put together my forecast for 2012 – the chart below is very close to my call for the first half of the year!
Ok, after looking at all the charts, ask yourself the question; Is there anything to the January Effect?
Of course there is. If you think about it from an incentive basis, financial institutions will quote the returns of the market. If they can tweak the markets upward in these light volume, yearend periods – then there is a huge benefit to them from a marketing perspective. Throw in the fact that as you enter a new year, tax incentives also apply, whereas stocks that were out of favor and sold in the previou year, can be bought back. That influence generally lasts 1-2 weeks into January.
Now there are numerous other issues. What was the performance before the end of the year. If the market is over bought, you should expect some profit taking into the new year. And from my perspective, as someone who believes what’s more important is not as much what you see in the chart, but what’s going on behind the chart, be it breadth and sentiment, etc. This shows what traders and investors truly think about the market. Annd the influence of these indicators makes a better predictor of future price action of the so called January Effect.
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