The January effect is predicated on the theory that investors tend to sell of their losing stocks towards the end of the year in order to write the losses off on their taxes. Therefore, according to the January effect, stocks will tend to dip towards the end of the year and rebound in January when tax-loss selling has ended.
The January effect is supposed to have a greater affect on small-cap stocks (as opposed to large-caps) since it is assumed that a relatively small amount of tax-loss selling will still have a significant impact on a relatively small, thinly-traded company.
For a detailed analysis of the January effect plus many other stock market anomalies and indicators, try Chart of the Day.
