What’s “the January Effect”? It’s a simple seasonal investing rule that goes something like this: “as goes January, so goes the rest of the year.”

Seasonal investing proponents like Brooke Thackray pay attention to rules such as “sell in May and go away,” but they don’t do this at the expense of first checking with real-time economic and market data.  Although “sell in May and go away” has worked in many market cycles, it didn’t apply during 2009, a year with some of the oddest market behavior from the past century.

What Is Seasonal Investing, and How Does It Work?

January Stock Market Behavior

.
The theory says that you need to compare the market close at the end of January with the market open at the beginning of January (i.e., with the market close from the last trading day in December of the previous year).  So, choose the index you’re working with – say, the S&P 500 – and then check its opening levels for the year and compare it with the closing levels on the last trading day in January.

If the market close is lower than the market open at the beginning of the year, this is supposed to set the tone for the rest of the year’s market performance (at least, on that particular index).  In particular, it could mean that the market will retest the previous month’s lows and potentially fall back to the next major previous support levels.

Seasonal Investing Strategies and a New Seasonal Rotation ETF

Whether or not this bears true is simply a matter of historical fact – how or why it should work is another matter altogether.  But it’s easy enough to test yourself.  I wouldn’t bet your whole portfolio on it, but perhaps use it as a suggestion for other strategies you might want to think about using.

If January – which is supposed to be a good month for stocks on the whole – doesn’t confirm this broader trend in any given year, it could be a sign of a weak market ahead, especially if there is little buying power catching stocks on the downside.

If you liked this article, please retweet it on Twitter or consider adding me to your blogroll.  I’d also love it if you subscribe to my RSS feed for free tips and posts like this one delivered right to your reader or by email (posts are not for duplication).

• Second Half of the Year: Portfolio CheckUps, The Congressional Effect and Markets Going Forward
• China's Biggest One-Day Loss of the Year
• No Santa Claus Rally This Year
• CML Healthcare Conversion to Corporation
• Will the September Correction Come in October?

• Are You Still Bullish on Investing in the Long Term?
• Investing for Recent Graduates
• Reminiscences of a Stock Operator (Wiley Investment Classics)
• Alternative Income Streams Progress - September 2007
• Choosing the Right Types of Investments

Tagged as: Brooke Thackray, cyclical investing, investing in stocks, investing rules, investing tips, investment advice, January, January Effect, Larry Berman, market movements, market timing, market trends, moon cycles, seasonal investing, seasonal stock, stock performance, stock trends, strategies, theories, tips