Skip to content Skip to footer

The January Effect

The January Effect refers to a possible pattern or phenomenon that stocks exhibit, in particular small-cap, whereby the tendency is a rise during the last several trading days in December and then a continued rally throughout the first week of January. This rally is generally attributed to an increase in buying, which follows the drop in price that typically happens in December when investors, seeking to create tax losses to offset capital gains, prompt a sell-off. Once the New Year rolls around, they buy back the same stock, pushing up prices.

The Concept has been widely debated for decades, and recent research has shown that if the effect offers any trading edge at all, it is slight and short lived. This article aims to offer the trader and investor an explanation of where the hype comes from and why it matters.

So how does it work?

A number of theories try to explain the reasoning for the rally in stock prices in January. The most obvious being the practice of “Window Dressing”. This idea holds whereby Mutual Fund managers will go “shopping” at the end of December to buy stocks that greatly appreciated during the year. The listing of these stocks in the fund’s annual report would look good to the shareholders, whereby the portfolio is “dressed up” to contain a few extra valued stocks. The prices of the stronger stocks rally even further due to the high demand, hence the rally in January.

Conversely, the opposite holds for weaker stocks that year, where again, as the year end approaches many investors and fund managers will look to offload poor performing stocks so as to trim the fat off portfolios and get rid of their ties to bad investments.

Primarily, however, the heavy trading volume is influenced by tax considerations, whereby much of the selling of stocks is done in order to realize capital losses that can be used to offset capital gains elsewhere. As the New Year begins the gains from these sales are more often than not reinvested into the market prompting stocks to rally.

It is often argued, however, that stocks typically rise in January due to trader psychology. The very simple idea that a new year brings new hope, and for some a way to invest in the market some end of year bonuses.

This historical trend, however, has been less pronounces in recent years, some believing the expected rally has already been priced into the market, and has adjusted for it. Tax-sheltered retirement plans have also grown in popularity, ending the need for many investors to sell and rebuy stocks for tax reasons.


Tradeview Ltd. is not a portfolio manager or an investment advisor. This Market Report is for informational purposes only. Any statements made or opinions voiced in this Market Report do not constitute investment advice. The Tradeview Ltd. Market Report does not constitute a solicitation to buy or sell in the financial markets. Although the information contained in the Market Report comes from trusted sources, Tradeview Ltd. is not responsible for guaranteeing the accuracy, timeliness, completeness, or fitness of such sources. Tradeview Ltd. shall not be responsible for and disclaims all liability for any losses which may be suffered from access and use of the contents of the Tradeview Ltd. Market Report. Trading any financial instrument on margin, using leverage or otherwise involves considerable risk. Therefore, before deciding to participate in any style of trading, you should carefully consider your investment objectives, level of experience and risk appetite. Most importantly, do not invest money you cannot afford to lose. Consulting with your investment counselor, attorney, accountant or other professional upon whom you rely for guidance as to the appropriateness of an investment in any style of trading is recommended.

Tradeview Ltd.

Is licensed to carry on securities investment business and is regulated by the Cayman Islands Monetary Authority (CIMA) as a full securities broker-dealer. Tradeview conducts business pursuant to the Cayman Islands Securities Investment Business Law (SIBL) and its activities fall under the direct supervision of the Investments and Securities Division of CIMA.
Headquarters: 5th Floor Anderson Square, 64 Shedden Road, Georgetown, Grand Cayman, Cayman Islands KY1-1002, BWI.

Tradeview Asia Ltd.

Is licensed and regulated by the Labuan Financial Services Authority (FSA) as a Money Broker, registration number LL15870 licensed to facilitate transactions in foreign exchange pursuant to Labuan Financial Services and Securities Act 2010, the Labuan Companies Act 1990 and the Labuan Business Activity Tax Act 1990.
Headquarters: International Business Financial Centre at Office 5, Jamie Business Center I, Unit F10, First Floor, Paragon Labuan, Jalan Mustapha, 87000 Labuan F.T.

Tradeview Europe Ltd.

Is licensed as a Category 2 Investment Service Company and is regulated by the Malta Financial Services Authority (MFSA). The Malta Financial Services Authority (MFSA) is the single regulator for financial services in Malta. MFSA is a fully autonomous public institution and reports to Parliament on an annual basis. The MFSA is a member of the European Banking Authority (EBA), the European Securities and Markets Authority (ESMA) and the International Organization of Securities Commissions (IOSCO) and is a signatory of the Multilateral Memorandum of Understanding with other European regulatory Institutions. Tradeview is authorized to provide financial services across multiple asset classes and is passported in the EU/EEA under MiFID II (EU Markets in Financial Instruments Directive).
Headquarters: 157 Archbishops Street, Valletta VLT Malta 1440.

Tradeview Financial Markets S.A.C Global

Is authorized to conduct business pursuant to and in compliance with the General Law of Companies (LGS) promulgated by the government of Peru. Tradeview Financial Markets S.A.C is registered with the National Superintendence of Public Registries (SUNARP), company number 13089531. Tradeview Financial Markets S.A.C provides financial services in selected OTC derivative markets in compliance with all applicable government regulations.
Headquarters: Los Mirtos 239 Urb. San Eugenio, Lince, Lima, Perú.