WASHINGTON INVESTING: The January Effect: Another Theory of Market Behavior
There are no sure things in the stock market. But one of the most reliable direction-finders is the so-called "January effect.Û The phrase describes a theory of market behavior that states: ÛÏStocks that fall in December will rise again in January."</br></br>For the past four years, Bonnie Wachtel, vice president of Wachtel & Co. of Washington, has tested this seasonal trading strategy and found that it works. While it was tougher to make it work this year than last year, Wachtel said, the strategy worked well enough to bolster her belief in the January effect.</br></br>"Our strategy is intended to identify stocks that are likely to depressed at year-end from tax selling by investors, who-have substantial losses in those stocks,Û Wachtel ' said. "We purchase shares in December and sell them in January, hopefully at a quick profit, when the selling pressure abates."</br></br>During last December, Wachtel invested $24,625 in 10 depressed stocks. In January and early February, she sold the shares for a total of $29,625, a gain of $5,000 or 20 percent. During this same time period, the Dow Jones industrial average moved up 9 percent, putting the performance of her stocks far head of the blue chips.</br></br>When the commissions are included, the total cost of her shares rose to $25,325. And the sale brought her only $28,925. So her true profit was lowered to $3,600. And her return was reduced to 14 percent for a six-week investment.