Monday Effect, January Effect And The October Effect For Stocks

Published: 29th January 2010
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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.

Retail sales follow the holiday season. Demand for commodities follows the growing season. Demand for fuel follows the weather. Keep these three calendar effects; The January Effect, The Monday Effect and The October Effect in mind when you trade stocks.

The January Effect: For the last many decades stock market tends to go up in the early part of January. The most obvious explanation is the most of the investors tend to sell at the end of December for tax purposes and buy back those securities at the beginning of January.

Holidays make us happy. Especially the New Year Holidays. There are New Year Parties and we all make our New Year Resolutions. So when January comes, we want to start the New Year with a bouyant spirit. So investors flock and start investing in stocks to put their money to work during 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.

Then there is something known as the Monday Effect. When the weekend ends our mood goes soar. Heck, another week has started. So most of us tend to be in bad mood on Mondays. Most of us are not happy going back to work on Monday. So this bad mood starts getting reflected in the market. During the weekend, we also tend to analyze the bad news during the past week. So the first thing we do is sell the stocks that we thing are not good. So stay away from the market on Mondays.

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!


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Mr. Ahmad Hassam has done Masters from Harvard. Turn $200 into $100K in just five months with this Penny Stock Trading System! Get these three Stock Trading Reports written by battle hardened investing professionals FREE.

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