This post was published on ZYX Buy Change Alert.
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The January Effect offers an opportunity to potentially make about 30% in three months, this is equivalent to 120% annualized return. It is a phenomenon that makes prices of certain stocks rise more in January than the market averages.
Over the last 30 years, we have made money from the January Effect about 80% of the time, broken even about 10% of the time, and lost money about 10% of the time.
Special Considerations For 2017 – 2018
This year there are special consideration due to tax reform.
- We had to hold off publishing the list, timing to enter the positions and timing to take gains, until the final tax reform details became available. Tax reform details have just become available. In a normal year, this list is published much earlier.
- There is an extra element of risk this year because there is no way to historically model the effects of the new tax reform on investor behavior.
- Our expectation is that majority of the selling has been postponed to January and February from November and December. For this reason the time to enter and take profits have shifted from a normal year.
- Buy zones are much lower from the prices at this time compared to a normal year. The reason is the strong rally with low volatility.
- The expectation is that volatility will pick up going forward and there will be down spikes bigger than what investors expect. The plan is to capture these big down spikes if they occur.
Why dips occur in certain stocks providing opportunities
The practical way to take advantage of the January effect is to buy dips in certain stocks that may occur for the following two reasons:
1. Tax-loss selling. One strategy that is commonly employed by investors is to offset gains by taking losses on certain stocks. Such selling for tax purposes artificially depresses the price of certain stocks.
2. Window dressing. Portfolio managers in their reports do not want to show investors that they were holding stocks that did not do well. Therefore they sell such stocks artificially depressing them further.
Two reasons behind the January Effect
Historically the January effect occurs for two reasons.
1. Investors buy stocks that were artificially depressed because of tax-loss selling.
2. In January, Wall Street professionals get big bonuses. Those with big bonus prefer bargain stocks and drive up the prices of the stocks that were losers previously.
The conventional wisdom is that this effect applies only to small stocks. Our experience is that the effect is not limited to small stocks but applies to depressed stocks in general.
How to reduce risk
At The Arora Report, we advocate a basket strategy to reduce risk. The Arora Report publishes a basket of stocks to profit from the January Effect along with buy zones and position sizes. Most of the buy zones are below the market. The plan is to catch down spikes. Typically only 20%-30% of the stocks on the list get fills.
All stocks with fills will not be winners, there will be losers. Even some winners will have puny returns. Typically two to seven stocks end up with monster returns. The average return typically ends up about 30% over three months.
When to buy
These calls to buy remain valid until about February 28. On March 1, consider canceling all open orders that have not filled. After February 28, the securities on the list that have not filled are no longer valid recommendations and are withdrawn.
When to take gains
This year due to special considerations the plan is to take gains in March to May period.
Managing the trades
A practical way is to put in good-til-canceled orders (GTC). Consider putting small orders in tranches spread out in the buy zones. It is important to scale in. All orders will not fill. If there are not many fills, consider raising the order prices. Every year there have been a handful of stocks on the list that came within $0.25 of the top band of the buy zone and then went on to double. For this reason, aggressive investors may want to take liberty with the top end of the buy zones. If buying above the top band of the buy zone, consider reducing the quantity to reduce risk.
If you already hold some of the stocks in the basket, consider excluding those from your January effect list.
It never pays to chase the price. To be successful, consider buying only on the down spikes.
Please also devote only a small part of your portfolio to this strategy. Also keep mental stops of about 15%.
The list is regularly reviewed and the buy zones may be adjusted as time goes on based on market conditions.
36 Stock List With Buy Zones and Recommended Quantities.
To see the stock list, buy zones and recommended quantities, please take a free 30 day trial subscription to ZYX Buy Change Alert.
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