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Investing In January

>> Sunday, January 10, 2010

When investing in January, do take note of the January Effect and pay special attention to the first five days of January.

The January Effect is a calendar-related anomaly in the financial market where financial security prices increase in the month of January. This rally is generally attributed to an increase in buying, which follows the drop in price that typically happens in December when investors, seeking to create tax losses to offset capital gains, prompt a sell-off.

This type of pattern in price behavior on the financial market supports the fact that financial markets are not fully efficient. The January Effect was first observed in the early 1980s by Donald Keim who, at the time, was a graduate student at the University of Chicago.

The "First Five Days of January Indicator," which focuses, not surprisingly, on the market's direction during the first five trading days of the New Year. If its direction is up over this period, the Indicator's devotees argue, then January as a whole is likely to show a gain -- which in turn would bode well for the whole year.

2010 started out strong as the NYSE jumped 3.31% while the NASDAQ climbed 2.21%.

The Bulls won the battle of the January First Five Days Early Warning System, chronicled by the editors of the Stock Trader's Almanac. According to the Stock Trader's Almanac, the last 35 up First Five Days were followed by full-year gains 31 times, for an 86.1% accuracy ratio.

For the STI, it opened at about 2890 on 4 Jan and closed at about 2920 on 8 Jan. That is an approximate 1% increase. So, if the effect is going to continue, the outlook of 2010 looks optimistic for the equities.

Knowing this, what action are you going to take?


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