Did you ever forget your girlfriend’s birthday? If you have ever committed that mistake, you know the consequences. Calendar dates are very important in our lives. We plan vacations during the summers and winters. So, you are always looking at the calendar when planning our future. Some days and months in our lives are very important. But you will be surprised to know this that markets also tend to follow the calendar. Some days and some months in the year are also important for the market. Companies religiously publish their quaterly earning reports and forecast the earnings for the next quater. Companies close their books at the end of the year for tax purposes. At the end of the year, we all file our taxes. As investors we evaluate our returns on quarterly basis. Get these three stock trading reports, The Best Investing Lessons, The Ultimate Investing Test and A Hedge Fund Manager’s Best Advice FREE. Turn $200 into $100K in just five months with this Penny Stock Trading System. Learn forex trading the Recession Proof Business of 21st Century!
There are many interesting patters that we can discover by following the calendar. For example, retail sales tend to go up during the holiday season. Demand for commodities is linked with their growing seasons. The demand for fuel increases in winters. You need to keep these three effects known as the Calendar Effect while trading stocks. These effects are; January Effect, The Monday Effect and The October Effect.
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 two famous stock market crashes of 1929 and 1987 happened in October. So many traders have started thinking the October tends to be a bad month. Nobody knows why those crashes came in October but still people talk of the October Effect in the stock market. Anyway the tech bubble crash in the NASDAQ Market came in March 2000, so you never know October is bad or March is bad. In 2008, stock markets crashed again in March. So people will start talking of the March Effect too!
