Blog : Get Ready for the January Effect

by Ed Zwirn on November 28th, 2013

As you emerge from your Thanksgiving family dinners and look toward the end of the year, it is an appropriate time to think about positioning your penny stock investment portfolio going into 2014.

To be sure, with the stock market attaining new highs with almost every trading session, trying to time the market to maximize your gains (and/or minimize your losses) can seen almost impossible. Investor opinion about the direction of the market, although generally bullish, remains divided, with many taking the new market highs as an indicator that the party is about to come to an abrupt, bubble-like end.

But, barring any abrupt bubble-bursting, investors in penny stocks and other small-cap companies can probably count on the January effect. Discovered over 30 years ago, the "January effect" is the name given to the tendency for stocks--particularly penny stocks--to perform better in January than the subsequent months of a given year.

In 1976, when the first "January effect" observations were published, it was noted that from 1904-1974 the average stock market return for the month of January was 3.48%, compared with a monthly return of 0.42% for the remaining 11 months of the year. Further research has shown that there appears to be no January effect for the 30 Dow Jones Industrial Average blue chip stocks, and that the January jump is more pronounced the farther down you get in terms of share price.

It seems to have worked out that way so far this year. In January, the Russell 2000 index, useful as a measure of small-cap stock performance, went from 849.35 to 902.09, beating the Dow to gain 6.2%. In contrast, the 10 months since then have seen the index gain 2.65% per month.

Entering not too far into the realm of speculation, the stock market seems poised to continue the moderate, steady gains it has seen since the end of the debt crisis in October, through year end at the very least. Come January, so the theory goes, the big investors, spending Christmas bonuses and taking advantage of tax incentives, will probably pump money into the market at a higher rate than they will in later months.

This can be a godsend if you position yourself in some solid, low-priced shares, in the right economic sectors, at year end. All else being equal, you can expect these shares to have a better shot in January than at any other time, at least if history is any guide.

P.S. Happy Thanksgiving one and all!