Has the January Effect Become the October Effect?

Rally Rationale

The Dow and S&P dawdled today, but the Nasdaq Composite Index rumbled to a new record. It's silly to read too much into today's action, however, given the bond market was shuttered in observance of Columbus Day. (This after bonds closed early Friday in anticipation of the holiday, to which I can only say: only the bond market, only in America.)

Despite a lack of oomph in blue-chips today, many market players are forecasting a continuation of last week's rally. In large part, the expectation for strong third-quarter earnings is the linchpin on which bulls hang those short-term expectations.

But don't forget about tax-loss selling. The practice of large institutions and individuals selling stocks that have been losers for tax purposes late in the year has spawned a cottage industry of market players searching for candidates likely to get a boost when the new year begins. Anticipation of this so-called January effect is so prevalent it's accelerated the process by several months (and, for example, is perhaps one factor in the recent resurgence of drug stocks, which have struggled for much of 1999). ...