shutterstock_131387006Investing in the stock market can be quite challenging. Traders and investors take on different strategies to make sense of the market and try to predict the probable market activity in order to earn some gains. In many cases, experienced investors may be able to predict to a certain degree how the market can behave at a certain time by analyzing the trends and movements.

Although it may be far from accurate, technical analysis of the stock market may be a more reliable tool to base investment decisions on. It adds some objective reasoning into your decisions as opposed to simply making hasty and careless moves in the market and see what happens. But inasmuch as people can try to analyze and predict the stock market with care, there are certain market anomalies that seem to persist and yet remain a puzzle to many investors. These anomalies can happen without explanation and with some regularity. Here are some of the more common market anomalies that you should know about.

January Effect

The January Effect is a well-known anomaly in the stock market circles. It is based on the strange phenomenon that underperforming stocks in the previous year tend to outperform the markets in January.

Experts may have a logical explanation for this anomaly. Many investors tend to let go of underperforming stocks or assets in December in an effort to offset their capital gains taxes or take advantage of a small deduction IRS allows for net capital losses for the year. The selling at the end of the year can sometimes push the stocks down to levels where they become attractive to investors come January. This may help the buying frenzy for such stocks, heralding the January Effect.

Days Of The Week Anomaly

This anomaly is based on observation that stocks tend to move more on Fridays than on Mondays. Fridays also seem to have better market performance as compared to Mondays. While the difference may be small, this effect is quite persistent.

While experts cannot provide any logical explanation to this anomaly because it doesn’t seem to make sense from the market point of view. Some believe that there may be a psychological component at work. Some people believe that more people feel more positive on Fridays as they expect the coming weekends. Then they spend the weekends catching up on reading about the markets, worry and fret about the upcoming market opening, which may result on some pessimistic attitude leading up to Monday.

Small Firm Anomaly

Another anomaly that is well-known is the small firm effect. Companies that are considered small and with smaller capitalization tend to outperform larger and more stable companies. There may be some grain of truth into this anomaly. Smaller, upstart companies usually have a wider berth for growth and development as compared to larger companies. As their growth prospects are computed proportionately to their size, i.e. big companies may require a higher sales volume or revenue to achieve profitability compared to smaller companies, then it may be quite easy for the smaller fish in the market to outperform the big ones from this perspective.