The January Effect tends to offer an opportunity to potentially make about 30% in three months — equivalent to a 120% annualized return. It is a phenomenon that makes prices of certain stocks rise more in January than the market averages.
Over the past 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.
The Arora Report has published a list of 36 stocks to take advantage of January Effect stocks. The list includes a range of small stocks to well-known stocks, such as, for example, General Electric.
To generate 30% returns, it is critical to buy in a certain specific way. The chart illustrates how and when to buy GE GE, -0.29% , for one.
The chart
Visit the Arora Report for an annotated chart of General Electric, and please note the following from the chart:
• In a year that has seen indices such as the Dow Jones Industrial Average DJIA, +0.11% , S&P 500 SPX, +0.08% , the Nasdaq 100 NDX, +0.03% and Russell 1,000 RUI, +0.08% rocket to new highs, blue-chip GE has lost a lot of value.
• A bottom in a stock occurs when sellers get exhausted. Seller exhaustion often shows up as heavy volume on a down day. The chart shows that this hallmark of seller exhaustion has not occurred in GE.
• The RSI (relative strength index) has been falling, but the chart shows that there is more room to fall.
• The chart shows the zone where a large number of “stops” likely exist.
• If GE stock starts approaching the potential stop zone shown on the chart, “hunt-and-destroy” algorithms may kick in. Those algorithms search for stops, take them out and in the process temporarily drive the stock lower.
Based on the foregoing, the time to buy GE will be on a down spike when stops are taken out and volume is heavy. This is how we determined the buy zone for GE. This exact buy zone is provided to the Arora Report subscribers.
Stocks in the January Effect list fall in different categories. There is a different process for determining buy zones for each category. For some categories, the process is simple while for others it is quite complex. The process for determining the buy zone for GE is a simple one, as illustrated above.
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Special considerations
This year there are special considerations 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. 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 the 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 has 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.
Diversify away from FAANG stocks
Many investors are heavily concentrated in the FAANG stocks of Facebook FB, +0.93% , Apple AAPL, +0.02% , Amazon AMZN, +0.47% , Netflix NFLX, -0.81% and Google GOOG, -0.70% GOOGL, -0.53% . When asked for ideas for diversification away from FAANG stocks, investors often mention names such as Nvidia NVDA, -0.14% , AMD AMD, +0.67% , Micron Technology MU, +0.54% and Tesla TSLA, -1.78% .
In my view, this is not diversification because they all belong to the same strategy. The January Effect provides a totally different strategy. My more than 30 years in the markets have shown that investors can get an edge by diversifying based on strategies. For example, at the Arora Report we have over 50 strategies that we pick and choose from to make sure our portfolios are diversified based on strategies.
Why dips occur in certain stocks
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 those 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 bonuses 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% to 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 is about 30% over three months.
When to buy
These calls to buy remain valid until about Feb. 28. On March 1, consider canceling all open orders that have not filled. After Feb. 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 the March-to-May period.
Make your own list
You can make your list by screening for the criteria that give rise to the January Effect and incorporating special considerations for this year, listed above.
At times you will need to make adjustments to your list. For example, Energous WATT, +168.10% is on the list. The stock is known for its wireless phone charging technology. The stock fell out of favor when Apple picked a competing technology. For this reason the stock ended up on the January Effect list. Now the FCC has just certified Energous’s WattUp transmitter, which sends power using RF (radio frequency) to devices at a distance. This is a major new innovation for phone charging. Energous’s stock has jumped on the news. Thus, the buy zone for Energous will have to be adjusted.
Caution
It never pays to chase price. To be successful, consider buying only on down spikes.
Please also devote only a small part of your portfolio to this strategy. Finally, keep mental stops of about 15%.
Disclosure: Subscribers to the Arora Report may have positions in the securities mentioned in this article or may take positions at any time. All recommended positions are reviewed daily at The Arora Report.
Nigam Arora is an investor, engineer and nuclear physicist by background, has founded two Inc. 500 fastest-growing companies, is the developer of the adaptive ZYX Global Multi Asset Allocation Model and the ZYX Change Method to profit from change in trading and investing. He is the founder of The Arora Report, which publishes four newsletters. Nigam can be reached at Nigam@TheAroraReport.com.