Does The January Effect Work?The January effect is suppose to be an indicator of where the market will go in the month of January and for the rest of the year after it. There are two affects that the month of January should have on the markets. The first effect that is supposed to happen is a rally. During the end of the year investors sell stocks that have made them a loss to gain the benefits of writing off the losses in their taxes. When the year starts up again they have a ton of free money and use it to buy back more stocks. As a result the first two weeks of January should bring a rally. The second January effect is, “As January goes so goes the Year”. Meaning if the markets are up in January we will be up in the rest of the year. If the market is down in January, we will keep going down for the rest of the year. So, how accurate are these? Does it actually work? Well I’m not going to bet the rent money on it, but I did a study on it anyways. I collected data on the years between 1998-2008 to see what happened to the SPY in January and in the rest of the year. Here are the results. 
Out of the 11 years only 6 of them had a positive January and the average gain in January was actually -.86%. That seems to imply that at least in the last 11 years this effect has not been true.The other effect seemed to hold more truth to it. 7 of the 11 years seemed to be predicted by the January, so if the First month was up, the rest of the year was up. If the first month was down the rest of the year was down. Either way it appears that there was a correlation between January and the rest of the year. |
