Mutual funds and ETFs typically have an operating year that ends on Halloween. They do their year-end tax selling in September and October.
Other taxable investors, like insurance companies and you and me, have tax years that end on New Years Eve. So we all do our year-end tax selling in December. We sell stocks we have losses in.
Smaller-cap, low share price, limited liquidity speculative stocks, which are mostly the domain of retail investors, are particularly hard hit during December. Part of this is the volume of selling; part is marketmakers who are loathe to take on inventory and who can sense anxious sellers, dramatically lower their offers.
what it is
Just as there’s most often a November stock market rebound from mutual fund/ETF selling, there’s also typically a January rebound from December tax selling. This is the January effect.
It has two parts:
–the losers from the prior December rebound. Again, this is partly that new buyers appear, attracted by now-lower prices, partly that marketmakers respond by raising their bids. Low share price speculative stocks normally lead the parade.
–investors of all stripes tend to defer sales of stocks where they have gains until the new calendar year rolls around. This is also income tax-related. If for no other reason than some investors want to trim the size of their winning positions, the prior year’s big gainers typically open the year poorly.
how long it lasts
The January effect usually lasts about two weeks; some years, however, it goes on for most of the month.
This January my guess is that energy stocks, which have sold off heavily throughout 2015, will show at least a temporary rebound. My worry about them, other than that current financials aren’t yet available, is that the seasonal low point for demand is still ahead of us. That’s normally in late January-early February.
It may also be that the stars of 2015, like Amazon and Netflix, will take a step backward.
It will be interesting to observe how the new month starts out.