Seasonal Effects on Stock Prices:January Effect: Finance Trading Times

Seasonal Effects on Stock Prices:January Effect

Here is something that might be of great interest to the traders and market-makers who trade on intra-day or weekly basis:

Empirical studies suggest that a variety of seasonal and temporary effects can be observed in the behaviour and movement of stock prices. Among them, the primary ones are:

• The January Effect: Stocks, on average, tend to do much better in January than in any other month of the year.

• The Weekend Effect: Stocks, on average, seem to do much worse on Mondays than on any other day of the week.

• The Mid-day Swoon: Stocks, on average, tend to do much worse in the middle of the trading day than at the beginning and end of the day.

One thing should be noted very well that while these empirical effects are only historical, they atleast provide some basis for traders, However, it is not at all certain whether any of them can be used with 100% accuracy to generate excess profit from stock trading.

In this article, I’ll concentrate only on the January effect and in the later articles, I’ll cover the remaining.

The January Effect in Stock Prices

• Studies of returns in the United States and other major financial stock markets have revealed strong signals in return behavior during different months of the year.
• As observed, Returns in January are significantly higher than returns in any other month of the year. This phenomenon is called the year-end or January effect and it can be traced to the first two weeks in January.

Another interesting observation is that the January effect is found to be much more prominent for small cap stocks or small firms than for larger firms.

As can be observed from the graph of the figure above, the monthly returns in the month of January have been significantly higher. However, the data used dates back to 1927 and hence conclusion can be drawn from the above chart for trading only based upon your risk taking responsibility.

In the next article, let's discuss about the explanations, reasoning and whether and how to benefit from such an effect.
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2 Comments: Post your Comments

Aniruddha said...(on 14 December 2007 at 05:17 )  

This is great Information
I was looking for such thing for a long time. heard of Buy in Sept sell in March kinda thing.


nickp2 said...(on 15 December 2007 at 21:35 )  

Hi Shobit,
I read a article recently where it said that SEBI has fixed the expense ration for Index fund at 1.50%.Also i have seen the performance of all funds on a 1 year basis and none of the funds have either outperformed the index or are in Sync with the index.They are all giving returns which are 5% less the index which they track.I dont know how to attach an excel sheet to this comment.If you give me your mail address i will be happy to mail across the findings to you.Now is it good to still invest in Index funds even though they are charging such high expense ratios for passive management of our funds.....?
With Regards

Wish you all happy and fruitful trading and investing activities with safety! = = = Post a Comment

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