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"January effect" losing its influence on the market

Investors may be able to add the so-called January effect to the list of market-predicting tools that have lost their effect on the market.

From watching hemlines to charting Super Bowl winners, investors have a long history of linking the movement of the stock market to some dubious calculations.

Investors may now be able to add the so-called January effect to that list. Although it once appeared to be a useful tool for predicting the movement of some stocks, its power of divination has been diminished in recent years.

The January effect describes a pattern of certain stocks jumping in value in January. The cause was a correction from some heavy selling in December.

For example, if a particular stock had performed poorly throughout the year, investors would sell the shares in December to record a capital loss. That loss could then be used to offset any capital gains.

Selling underperforming stocks drove their prices even lower in December. But in January, bargain hunters would swoop in and buy the shares, driving the prices higher.

But many analysts say that the January effect has lost its power for

A rough year
These are the 10 worst performing tech stocks for the first 11 months of 1999. Will the "January effect" cause their prices to fall further in December?
Company Ticker 11/30/99 Stock Price % change from 12/31/98
1. Western Digital WDC $3.88 -74.27%
2. Micro Warehouse MWHS $11.75 -65.25%
3. Ingram Micro IM $13.38 -62.19%
4. Networks Associates NETA $25.25 -61.89%
5. Policy Management Systems PMS $20.13 -60.15%
6. Maxtor MXTR $6.06 -56.70%
7. CompUSA CPU $5.88 -55.02%
8. Xerox XRX $27.38 -53.60%
9. LHS Group LHSG $25.13 -51.33%
10. Ticketmaster Online-CitySearch TMCS $28.38 -49.33%
Note: CNET tracked the performance of more than 400 technology companies and narrowed the list to only those companies that had a market capitalization of more than $1 billion on January 1.
predicting how stocks will perform in December and January. Among the reasons: The long tech-fueled bull run, greater access to the markets by individuals and more knowledgeable investors.

"Investors know to look for this [bounce]," said Peter Coolidge, the managing director of equity trading the investment firm Brean Murray in New York. "If the stock of certain companies gets too depressed and the main reason is that people are selling rather than any fundamental problems, you now see investors step in and buy that stock, affecting how low the stock drops."

Coolidge added: "The [January effect] might more appropriately be called the 'December effect' or the 'November effect' because investors aren't waiting till January to buy."

Coolidge said he thinks it is hard to isolate the reasons why a stock may fall at the end of the year, with the tax-driven sell-off perhaps being just one ingredient in the mix.

Whether or not the phenomenon holds true this year, analysts said that many investors still play the markets based on the belief that the pattern will repeat itself.

"There are no hard and fast rules, but investors always want something hard and fast that maybe gives them some sense of continuity from year to year," said Lawrence Silver, an analyst at the investment banking firm of Raymond James in Tampa Bay, Fla.

"Sometimes it helps to have these indicators, but I would prefer that people looked at the long-term fundamentals of individual stocks and the market itself and not worry the month," he said.

And as more investors fuel the online trading explosion, some analysts think the January effect will increasingly begin to fade as online traders buy stocks as soon as they dip. Others say online trading has little or no effect on the direction of the markets. For example, 80 percent of the volume on the New York Stock Exchange is from large institutional investors.

"Just because there are more investors making transactions, it doesn't necessarily move stocks, because these [investors] are making relatively small transactions," said Dan Burke, a senior brokerage analyst at research firm Gomez Advisors.

What will happen this year remains to be seen, especially given that some portfolio managers may sell assets to strengthen their cash positions in fear of Y2K-induced market turbulence.