January effect

The January effect, which is a tax evasion strategy by retail and institutional investors who deliberately realise losses and buying them back like no change has happened in their portfolio.

Of course, January effect takes place at the first week, prolonging a 5 consecutive days of dip. This is a real world phenomena observed over the years where traders and investors sell a losing position and buying them at the low in order to evade tax. The tax laws for stock market investors allows losses to be subtracted from the amount of payable tax similar to the deferred tax asset for a firm. January effect on Small cap stocks tend to produce higher return at the first 5 days than the rest of the year.

Since a loss is booked repurchasing them at the current price will make no difference, no money is lost and the demat has the same quantity of shares. In actual happening, what we neglect is the price change between selling and purchasing date. This might show variations, but altogether the market falls establishing a high possibility of repurchasing lower than the selling price. After the first week of January, everything returns to normal, the price takes a dive.

The graph explains the return in January and the returns on rest of the months in the same year.

The graph explains the returns on the month of January to the rest of the months in the same year. The returns from the dip to the normal level is astonishingly high for the small cap stocks (small) and decreases as the market cap increases (Big).

Similar effects:

  • Turn off the month effect
  • Turn off the week effect
  • The Weekend effect
  • Holiday effect

If someone reading here is dubious about these phenomena, the effects are absolutely noticeable on every ending period of a week, a month, and a year. Not a conviction, professionals have observed this for years and believe them with solid grounds and they do repeat every year.