What does the January Effect refer to?

The January Effect refers to a market phenomenon where stock prices tend to rise in the month of January, especially for small-cap stocks. It is characterized as a market anomaly because it deviates from the expected behavior suggested by efficient market theory. The increase in stock prices during January is commonly attributed to a variety of factors, such as year-end tax selling, where investors sell off losing stocks in December to offset gains for tax purposes and then reinvest in January, and the influx of new investment contributions at the start of the year.

Understanding the January Effect is crucial for traders and investors as it presents potential opportunities for profit during a historically bullish period. Recognizing this trend can aid in forming strategies that capitalize on the seasonal purchasing behavior. The other options point to different concepts in finance but do not capture the essence of the January Effect as a recognized anomaly related to stock performance in a specific month.