There's also a possibility that investor psychology drives much of the phenomenon. Many people tend to start new things at the beginning of the year, and taking a run at the stock market might be one of them. Even just the perception of the new calendar year -- believing you're "starting fresh" or that you're "turned over a new leaf" -- can have a tremendous impact on individual behavior.
Still, the January Effect has appeared to wane in recent decades. Fully explaining the deceleration of the effect is difficult, but there are some theories. First, the advent of more tax-sheltered retirement vehicles, such as individual retirement accounts (IRAs) and 401(k)s, has made trading for tax-loss harvesting purposes less relevant. Also, given that many people are aware of the possibility that prices may rise in January, there is a more transparent opportunity to proactively adjust for it.
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