How to Monitor the January Effect in 2010
Many traders are throwing around the term “January Effect,” especially as we turn the corner into January 2010. Some are trying to profit from the “January Effect,” but what is this ‘effect’ and how can we monitor it? Let’s find out. According to Wikipedia , the January Effect is defined as a “calendar-related anomaly in the financial market where financial security prices increase in the month of January. This creates an opportunity for investors to buy stock for lower prices before January and sell them after their value increases. Therefore, the main characteristics of the January Effect are an increase in buying securities before the end of the year for a lower price, and selling them in January to generate profit from the price differences.” The main idea is that investors ‘dump’ shares of small capitalization (cheaper) stocks - which are more volatile - and then when these investors reinvest, they may buy additional small cap stocks, which will be better bargains and also rise faster than less-volatile large cap stocks (Blue Chips). Thus, small cap stocks tend to ‘outperform’ large cap stocks in January.
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How to Monitor the January Effect in 2010