Mid December January Effect

Why do you invest your hard earned cash in the stock market? Ask yourself this question. Please think carefully and truthfully; now write down your answer before you continue reading.

Is it for retirement, for income, for real estate, your kid’s education, etc.?

Whatever the reason, I am sure most of you have developed a set of rules to follow before dumping thousands of dollars into the market.

If not, how do you know when to buy and sell without a documented set of rules based on a proven strategy? Under what circumstances do you buy and sell? What are the criteria that you use to make those final decisions that will affect you and your family? Do you even know what position sizing and expectancy are?

Anyway, according to the Stock Trader’s Almanac, the January Effect now takes place during mid-December. Many publications and stock market “gurus” will be talking about the January effect and how you may profit from the cyclical trends that supposedly exist.

From Wikipedia, the free encyclopedia:

The January effect (sometimes called “year-end effect”) is a calendar effect wherein stocks, especially small-cap stocks, have historically tended to rise markedly in price during the period starting on the last day of December and ending on the fifth trading day of January. This effect is owed to year-end selling to create tax losses, recognize capital gains, effect portfolio window dressing, or raise holiday cash. Because such selling depresses the stocks but has nothing to do with their fundamental worth, bargain hunters quickly buy in, causing the January rally.

The point of this article is to remind my readers to steer clear of the hype behind so called special situations that don’t play into your developed trading system that was designed to fit with your personality and emotions. Some talking heads may try to convince you to buy beaten down shares in companies that will bounce in the first two weeks of the year based on historical cycles. I see too many people jump at the opportunity to change their investing beliefs because some guy on the other end of computer wrote an article claiming to make you lots of money over the final two weeks of this year and the first two weeks of the year.

Instead of wasting your time studying theoretical bounces that may or may not occur, take the time to review last year’s trades and document the positive and negative aspects of your portfolio.

• Exude your metal strength and trading conditioning while ignoring the noise coming from different directions.
• Study your best trades and understand why they were the best trades.
• Analyze your losing trades and understand where you made the mistake.
• Correct those mistakes in the coming year and understand if the losing trade was the right move.
• Sometimes losing trades were placed properly but the investment just didn’t work out as expected. That’s life in this game!
• Be honest with yourself and highlight the areas that need work and continue to polish your strengths.
• Don’t abandon what is working because a talking head on television tells you his system works in only 15 minutes per day, two days per month.

You could always forgo the hard work of developing your own screens each night so you can save time by buying and selling the red and green arrows on the systems of late night television.

Stick to one system that works and try to consolidate the strongest features of that system to your advantage and ignore the hundreds of other systems and indicators that can be found on every investing web site on the net. Understand that you will modify this system over time as the markets evolve. Certain indicators, patterns and setups will work differently at different times so you must understand how to compensate for these changes in nature. It is a possibility that these changes allow some to believe in the January Effect but I chose to ignore it and focus on what I am doing.

Stay focused in the New Year, start fresh and think positive! Instead of reading 100 books on 80 different trading systems, reread a few essential books that focus on the style of investing that best suits your trading.