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Blog : The January Effect
December 11th, 2007
I was one of the first people to identify and explain the 'January Effect' as it applies to penny stocks. That was back in 1996 or so...
The laws of the January Effect apply just the same in 2007. In fact, I expect that they will always impact penny stock prices, because current government tax laws exaggerate the impact.
I will explain. First, make sure to read my previous blog, Tax Loss Selling Bargains.
What happens is that people dump losing investments before the new year, to take the capital gains loss, and therefore reduce their capital gains taxes owing.
Picture a thinly traded penny stock that has lost much of its value already. Some shareholders dump the losing shares, bring the penny stock down even further. Then, they owe less tax on all the money that they did make on other stocks and real estate.
In addition, consider that much of this tax loss selling is done at a time of holiday-induced low trading volumes, and the downside can be even more pronounced as a result. In other words, nobody is buying, but some people are dumping shares, which takes prices down.
In January, the 'artificial impact' of tax loss selling on share prices disappears. Meanwhile, the new year's resolutions often result in millions of people losing weight, quitting smoking, and sometimes even investing. Those investors pile in on these low priced shares.
Now the January Effect is a known, although hotly debated, phenomena in the overall markets, not just the penny stock markets. Whether or not the January Effect can be definitively proven among larger stocks, it becomes a self fulfilling prophecy.
You see, if 30% of the investor population believes in the January Effect, those 30% of people are more likely to invest leading in to January. This buying interest is prone to impacting shares positively.
As always, penny stocks see bigger price swings from buying and selling pressures than large-cap stocks.
The smaller something is, the less energy it take to move it.
Well, let's see it in action. Due to the January Effect, it could be a good New Year for penny stock investors!
If you want to get involved now with some of the penny stocks that will benefit from the January Effect, subscribe to Peter Leeds Penny Stocks.