Calendar Effect In The Stock Market
We all follow the calendar in planning our future so do the markets and so do many economic and business trends. Companies report their earnings quarterly. Tax is collected at the end of the year. Companies close their books for tax purposes at the end of the year. Investors are also evaluated quarterly.
Retail sales follow the holiday season. Demand for commodities follows the growing season. Demand for fuel follows the weather. Keep these three calendar effects; The January Effect, The Monday Effect and The October Effect in mind when you trade stocks.
So what is the January Effect after all. Is it real and why does it repeat itself every year.January Effect has been observed for the last many decades. It has something to do with the taxes and holiday. Every year, at the end of the year we have file for our taxes. So stock investors tend to liquidate their positions in the last week of December before filing for their taxes. They then reopen their positions in January. So massive selling in December makes the stocks cheap and every year their is a January Rally.
It may also be due to the fact that at the beginning of a New Year, people are flush with excitement and hope for the New Year that just started. They want the market to go up, so they go and buy securities and put their money to work for the rest of the year.
If the stocks go up in January, you could take a jump by buying in December. That would make stock prices go up in December and if they go up in December, you could buy in November. This is precisely what people started to do and now you will see a very weak January Effect taking place.
In an efficient market, these price anomalies are spotted by the people and then they trade on them until they disappear. Now some years January Effect can be really pronounced and other years it can be weak. Just use this January Effect to understand the market psychology not as a hard and fast trading rule.
Monday Effect: Monday is a bad day for the markets! People are not happy going back to work after the weekend. Second people spend the weekend analyzing bad news from the past week and just sell when they get back to the office.
The October Effect: Stock market had two great crashes one in October 1929 and the other in October 1987. Due to these two great crashes traders believe that bad things happen in October. Nobody knows why it happened in October but it happen so the October Effect. Tech bubble in NASDAQ market burst in March 2000, so you never know which month is bad!
Mr. Ahmad Hassam has done Masters from Harvard. Turn $200 into $100K in just five months with this Penny Stock Trading System! Get these three Stock Trading Reports written by battle hardened investing professionals FREE. Article Source:http://www.articlesbase.com/finance-articles/calendar-effect-in-the-stock-market-1779861.html
Leave a Reply