The January Effect

In Investing by DavidLeave a Comment

Will January set the course for 2014?

The January Effect is an anomaly in the market where prices increase in the month of January more than in any other month. This creates an opportunity to buy stock for lower prices before January and sell them after their value increases.

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 price differences.

Individual investors, who are tax-sensitive and who hold small stocks, sell stocks for tax reasons at year end (to claim a loss) and reinvest after the first of the year. Another potential cause of the January Effect is the payment of yearend bonuses in January. Often, bonus money is used to purchase stocks, driving up prices. The January Effect does not always happen so research needs to be done to profit.

The Trend is Your Friend

Stick with the overriding direction of the stock and you will do very well in 2014. There are several talking heads predicating a major crash in 2014; however, it is the same prediction year after year. Present market conditions are a bull market so stick with the trend.

Near year-end, compile a list of companies with stocks that have been beaten down as but that still have solid fundamentals. Look specifically for stories about companies and stocks that have taken a beating due to one-time or other significant events that a company can overcome. That way, when the selling subsides, investors will have the opportunity to book some large profits. If you do your research in December, come the New Year you stand to profit from the January Effect.

Let Your Fingers Do the Walking

Look through business journals, trade magazines, newspapers and websites. Google “biggest blowups of the past year” or “corporate disasters.” It can be an excellent source for investment ideas. Try to get in on companies that are experiencing a negative event that is unlikely to re-occur.

Beware the Naysayers

Look for companies that have been downgraded by a number of analysts. Harsh criticism tends to knock the wind out of stocks. Beware people with aggressively negative attitudes. I have found that everyone has an agenda. Overly aggressive naysayers could be trying to profit from you. If and when the stock picks up, there could be a flurry of positive, upbeat research that may then drive the stock higher.

Be willing to pursue even the most beaten down stocks. Remember: they must have solid fundamentals.

Not the Dollar Store, but Still Under $10

Many financial institutions won’t get into a stock if it trades for less than $10 a share because they don’t want to be accused of investing in low quality, low priced stocks or “penny stocks.”

Therefore, the idea is to buy into a company with sound fundamentals that trades just under that level – so that if and when it does punch through that mark, the profits can soar.

No one knows how things will play out for 2014; we can only speculate as to how things could play out. The old adage, “trend is your friend,” will be the best investment advice that could be given. Do your research and don’t get overly emotional during the rocky weeks and you have the potential to make a great profit. Stick with the trend of the higher time frame which will pay you in leaps and bounds and make 2014 the best trading year you have had.

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