January Effect

After the winter holiday break, many investors start the new year with an examination of their portfolios. When many investors add stocks to their portfolio, this usually increases stock prices due to higher demand. The pattern is common enough to have received the term "January effect." While not every January shows overall gains in the stock market, the pattern is common. 

Investors who want the best prices before the January rally can buy stock at the end of December. This is still a risky bet, however, as there are no guarantees that prices will in fact rise. Additionally, the rally doesn't always last the entire month, so traders need to be nimble to capitalize on short-term gains.

At the beginning of January, investors return to equity markets with a vengeance, pushing up prices of mostly small cap and value stocks, according to "Stocks for the Long Run: The Definitive Guide to Financial Market Returns and Long-Term Investment Strategies" by Jeremy J. Siegel (2002) and the "Stock Trader's Almanac, 2005" by The effect is most pronounced for small cap and value stocks, but it could also be extended to the entire equity market.

How can you benefit?

In terms of seasonality, the end of December has shown to be a good time to buy small caps or value stocks.