January 16, 2012
“A general increase in stock prices during 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.” - Investopedia
At the close of 2011, most financial markets closed on a pessimistic note. It is noteworthy that this was a continuation of the trend all year long.
Two weeks into the New Year, the mood and sentiment should have changed for the better but alas, we have had to contend with an untimely announcement from the Federal Government which came on January 1, 2012 that the fuel subsidy would end immediately as part of efforts to cut government spending .
This action led to popular revolt and a nationwide strike that basically shut down the economy for about 8 days.
While profitable transactions permeated market activities as seen in the ASI being up by 0.82% YTD, this was against the background of skeletal trading activities where Volume traded on the floors was significantly reduced.
Internationally, the markets have fared well in January 2012. The S&P 500 is up 3% for the year, the Euro zone debt crisis has yet to make new headlines and commodities have also performed well.
A well-documented phenomenon in financial markets is what is known as the January effect. Historically, risk assets perform best during the month of the January. They perform better in January relative to any other month of the year. The January effect is said to affect small caps more than mid or large caps. This historical trend, however, has been less pronounced in recent years because the markets have adjusted for it. Another reason the January effect is now considered less important is that more people have no reason to sell at the end of the year for a tax loss.
The January Effect is particularly intriguing because it doesn't appear to be diminishing despite being well known and publicized for nearly two decades.
There are many reasons for this.
One is that many investors sell assets during December for tax reasons, and then buy again in January. It is more pronounced for small cap and mid cap stocks than for large cap stocks.
Many investors tend to take new positions at the start of a year rather than towards the end of a previous year.
January Effect and the Nigerian Stock Exchange
The January effect on the Nigerian market was evident in the early days when it recorded positive returns. The real challenge is the rate at which it quickly went down once the strike was called off. In the weeks ahead, we will monitor the market to report on how the market responds – and confirm if it is a myth or something we should take seriously in our market.
Suffice to say, a heightened level of uncertainty promises to cloud the market space in Q1 2012 in the least. Economic Fundamentals were bad to begin this year http://www.proshareng.com/news/15957 and a key point to note is that many factors have changed from a fundamental perspective.
Time line of developments in the Economy
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