This calendar effect would create an opportunity for investors to buy stocks for lower prices before January and sell them after their value increases.
[2] It has also been noted that when combined with the four-year US presidential cycle, historically the largest January effect occurs in year three of a president's term.
[3] The most common theory explaining this phenomenon is that individual investors, who are income tax-sensitive and who disproportionately hold small stocks, sell stocks for tax reasons at year end (such as to claim a capital loss) and reinvest after the first of the year.
[4][5] Burton Malkiel asserts that seasonal anomalies such as the January Effect are transient and do not present investors with reliable arbitrage opportunities.
They do not appear to offer arbitrage opportunities that would enable investors to make excess risk adjusted returns.