Investment Warrior Report Archive Article

The January Effect 

Historically , January has been positive territory for the stock market, with stock prices rising most years in what has become known as the "January effect." The market has gained value in more than two-thirds of the Januaries since 1926. The probability of a January rise goes from 70% to 90% after a down year for the market like 2002. What is the main factor behind this? There's a tax incentive to sell losing stocks before the end of the year. Big tax-loss selling lowers valuations and puts extra buying power in investors' pockets two critical ingredients for January buying. With interest rates in money market funds hovering around 1%, investors are itchy to earn more. In addition, many short term indicators indicate an oversold bias, which in reality is bullish on a contrarian basis. 

The January effect is most pronounced among smaller stocks such as those found on the NASDAQ. Small-cap stocks have climbed an average of 2.6% in the Januaries dating back to 1926, while large caps have climbed a more subdued 1.1%.

Back in 1974, up until that time, December marked the end of the longest and deepest bear market since the Great Depression . It also marked the beginning of the 26 year long super bull market. A randomly selected portfolio of 50 stocks that had displayed the most extreme relative weakness in 1974, would have approximately Doubled in just 10 weeks in the early going of 1975. I do not possess a crystal ball, but if December marked the bear market end, (the NASDAQ experienced its worse December ever), the next two or 3 months may prove to be very profitable especially in the NASDAQ arena. January 3rd, will equal the longest and deepest bear market in the last 103 years, even surpassing the 1929 crash and Great Depression that followed it. Negative psychology can only last so long! It would not surprise me if the first quarter of this year is a remarkably favorable one. Use the mathematical timing models exclusively for verification of this hypothesis, and always obey all sell signals.



Copyright 2003 Lussenheide Capital Management