Traditionally, investors often sell stocks at the end of the year to lock in losses for tax purposes, then turn around and buy them back in the new year, creating the “January effect” that boosts markets as the year starts off. 2012 got off to a happy start thanks to this trend after what analysts are calling a “flat 2011.” On Tuesday, the first day of trading after the holidays, encouraging economic news from within the U.S. and around the world led the Dow Jones to climb 1.4 percent and close at the highest levels in five months while the S&P 500 Index also rose 20 points. In comparison, over the course of 2011, the S&P ultimately moved only 0.04 of a point from the beginning to the end of the year[1].

Analysts predict that the January effect will be particularly pronounced this year thanks to volatility in 2011, and one equity strategist described investors as being “a lot like dieters…look[ing] to January as a new beginning.” Since the first month of the year is a good predictor for U.S. stocks, it will behoove investors to continue to watch the markets this month since the month has failed to predict the direction of the markets only seven times in the past six decades.

Yesterday, stocks moved very little, which essentially served to help investors solidify their gains in the New Year. The Dow rise 21.04 points and the S&P moved up 0.24 point. Although the Nasdaq fell, it did so only slightly with a loss of 0.36 point[2].

Do you think that this January will set the trend for 2012? Would you admit it if you didn’t?

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