WSJ: What the ‘January Effect’ Means. It’s Not the Same as the ‘January Barometer.’

By SIMON CONSTABLE

During the first month of the year you may hear stock traders talk about the “January effect” and the “January barometer.” They sound similar, but they’re actually different.
The barometer tells you that if stocks are up in January, then the rest of the year should be good for stocks, says Sam Stovall, U.S. equity strategist at S&P Capital IQ. It’s a rule of thumb that has proved remarkably accurate. Since 1945, in years when the market was up in January, 84% of the time it continued rallying through the end of the year, with an average additional gain of 11.5%, says Mr. Stovall.
The January effect, on the other hand, refers to the phenomenon of stocks bouncing higher in January following a selloff in December.
The “mid-December dip” is the result of investors selling stocks to lock in deductible losses ahead of the end of the tax year, says Mr. Stovall. Then, early in the new year investors often use the proceeds of those December stock sales to buy different stocks, pushing up prices.
Since 1979, the average gain in the S&P 500 for January has been 1.14%, while the small-stock Russell 2000’s is 1.82%. Small-cap stocks tend to be more volatile than those with a bigger market capitalization.
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