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It is defined as a perceived seasonal increase in stock prices during January.
Analysts generally attribute this rally (a period of sustained increases in the prices of stocks, bonds, or related indexes) to two factors.
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The January effect was first noticed in 1942 but has been less pronounced in recent years. The hypothesis suggests that markets as a whole are inefficient. Efficient markets would not follow this effect.
Small caps - companies with a relatively small market capitalisation - are more affected by the January Effect than mid or large caps because they are less liquid.
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Besides tax-loss harvesting and repurchases, and investors putting cash bonuses into the market, the January Effect is affected by investor psychology.
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But it is suggested that too many people now time for the January Effect so that it becomes priced into the market, levelling out the effect.
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