In a general trend it is seen that the month of January in a calendar year depicts a specific pattern for stock markets wherein stock prices move up for the month more than any other month providing chance to investors to buy in stocks at dips at then sell them off in January with increase in value for them.
The recurring phenomena highlights that the market is inefficient as in the case of market efficiency, the said effect should not have sustained.
History of the January effect
The effect came into notice in the year 1942 by the investment banker Sidney B. Wachte who since the year 1924 witnessed a rally in small stocks mainly in the January month.
Reasons for the January effect
It is during this time of the calendar year that buying in the stock markets increases for reasons such as year end bonuses are paid out in January which is then deployed to markets bringing about a sharp rise in stock prices.
Another reason earmarked for the cause is that taxpayers for the purpose of some taxation such as claim of capital losses generally sell off their holdings in stocks during this year.
In respect of the Indian stock markets, where a large cash flow comes from FIIs and selling to claim losses by them makes January more significant than any other month.
And it is this selling hype that brings down the price in late December and then pushes the stock prices higher as and when additional buying is triggered.
Another interpretation of the January effect
There is yet another meaning to January effect in stock market investments which says that the market's direction in the January month reflects the movement for whole of the year say if it's positive the investor will gain through December and vice-versa.
So, the current state of Indian stock market reflects the January effect cannot be clearly known given the macro and political landscape.