What is the January Effect?
A recurring trend in the stock market during the month of January (mostly the first half of the month) wherein stock prices tend to go up.
Towards the end of the year many investors sell-off stock, in order to adjust gains and to lower the total profits of the year in order to reduce the amount of capital gains tax. At first, the massive sell-off of stocks creates a price drop, but as the sellers buy back the stock and the volume increases, the price tends to recover and even surpass the initial price level.
The rally usually begins towards the end of the year and continues during most of January. The peak is usually measured around mid-January, but can last longer. In order to find the starting point, we have to look for rising market volumes and an increase in volatility.