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.
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.
Besides tax-loss harvesting and repurchases, and investors putting cash bonuses into the market, the January Effect is affected by investor psychology.
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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