By Nigam Arora & Dr. Natasha Arora
Are you missing out on making money from the January Effect?
The January Effect
The January Effect offers an opportunity to potentially make about 30% in three months. In some years, over 50% return has been generated. Of course, the annualized return can be 120 – 200%. It is a phenomenon that makes prices of certain stocks rise more in January than the market averages.
History
Over the last 30 years, money has been made from the January Effect about 80% of the time, broken even about 10% of the time, and lost money about 10% of the time.
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 year-end 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
The January effect occurs for two reasons.
1. Investors buy stocks in January that were artificially depressed because of tax-loss selling in the prior year.
2. In January, Wall Street professionals get big bonuses. Those with big bonuses prefer bargain stocks and drive up the prices of the stocks that were losers the previous year.
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 15%-25% 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 or three stocks end up with monster returns. The average return typically ends up about 30% over three months.
When To Buy
Thirty years ago, one could simply buy depressed stocks in the last week of December. Now it has become more complicated.
This year due to the relentless buying by the momo crowd, the buy zones will stay valid until the end of January. In most prior years, buy zones remained valid until the end of December.
Please stay tuned to new posts as the above parameters may need to be changed due to the special circumstance of the market.
When To Take Gains
The plan is to take gains from late January to early April.
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. 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. Due to relentless momo buying, this year more liberty may need to be taken with 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.
Money Printing And Borrowing
The market has been running up primarily due to money printing and borrowing by the government. The buy zones are based on the anticipated course of money printing and borrowing. If there is a change, there may not be many fills or on the other side, this strategy may produce losses. It is important to pay attention to the Morning Capsules.
Caution
For conservative investors, it is better to not chase the price and consider buying only on the down spikes. There is no guarantee that this strategy will produce profits this time, the strategy may even produce losses.
Future Adjustments
The list is regularly reviewed and the buy zones may be adjusted as time goes on based on market conditions. Profit-taking signals may be provided in real-time.
The List Of 44 Stocks
The list includes 44 stocks, buy zones, and recommended quantities. It is extremely important to pay attention to the buy zones and recommended position sizes.
To see the list of all 44 stocks, including buy zones and position sizes, take a 30-day free trial to ZYX Buy.Change Alert .
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Nigam Arora
Nigam Arora is known for his accurate stock market calls. Nigam is a distinguished master of the macro. He is a popular columnist with over 100 million page views, an engineer, and nuclear physicist by background. Nigam has founded two Inc. 500 fastest growing companies and has been involved in over 50 entrepreneurial ventures. He is the developer of Theory ZYX of Successful Change Management and is the author of the book on Theory ZYX, as well as the developer of the ZYX Change Method for Investing.
Dr. Natasha Arora
Dr. Natasha Arora has significant expertise in investment analysis especially biotech, healthcare, and technology. Natasha is a graduate of Harvard Medical School followed by a postdoc at MIT. She has published several peer reviewed research papers in top science journals.
