We are looking for U.S. stocks which may benefit from the January effect this year.
Some stock pickers believe in a principle known as the “January effect,” in which stocks rally in the month of January. This effect is believed to be caused by stocks becoming oversold in December as a result of tax-loss selling and “window dressing” by portfolio managers. Window dressing is a practice in which portfolio managers, who must disclose their holdings at the end of an accounting period, sell their weak stocks and buy strong stocks in an attempt to make their portfolios look more attractive.
Stocks most influenced by the January effect should be those trading lower in December, and therefore are candidates for tax-loss selling or window dressing. In addition, stocks that have sold off strongly are more likely to have found themselves in an oversold position, and are therefore are more likely to rally in the coming months.
The screen. We will be using Recognia Strategy Builder to search for U.S. stocks that may be poised to benefit from the January effect. We begin by setting a minimum market cap-threshold of $10 billion. Although the January effect should impact all stocks, portfolio managers are more likely to be holding large-cap stocks than their small and mid-cap counterparts. Next, we will look for stocks that have sold off strongly in recent months. We will select only stocks that have experienced price declines of at least 10 percent over the preceding 13 weeks.
Finally, we will use a technical analysis oscillator, known as the relative strength index (RSI), to uncover stocks in an oversold condition. Our screen will identify stocks whose RSI has recently crossed above 30, signaling a bullish outlook.
What did we find? After trading more or less flat for the first three quarters of 2014, VMware sold off fairly sharply in the fourth quarter. On Oct. 21, the company announced third-quarter results in which it beat on both revenue and earnings but provided light guidance for the fourth quarter. The stock hit a 52-week low in mid-December, which was marked by a bullish RSI event, indicating a possible oversold condition. The stock has rallied since and may be poised to move higher should the January effect hold true.
Sprint Corporation’s stock had a challenging 2014, culminated by a 20 percent sell-off in the first two weeks of December. The stock hit a 52-week low on Dec. 16. The stock experienced a bullish RSI event the same day, indicating a possible oversold condition. The stock has rallied by about 8 percent since mid-December.
On Oct. 20, IBM issued disappointing third-quarter results, which caused an 11 percent swoon in the stock price. The stock declined until hitting a bottom on Dec. 16. IBM is a very widely held stock, which may have been affected by portfolio managers window dressing their portfolios prior to the end of the year. Since hitting a 52-week low in December, IBM has climbed about 5 percent and may be poised to climb further on the back of improved enterprise spending in 2015.
Like most stocks in the energy sector, Suncor Energy has been hit hard, declining over 13 percent in the past 13 weeks. Though no one knows where the price of oil will eventually find a bottom, some analysts say they believe the energy sector has become oversold, making energy stocks an interesting contrarian investment.
The investment ideas presented here are for information only. They do not constitute advice or a recommendation by Recognia Inc. in respect of the investment in financial instruments. Investors should conduct further research before investing.
Peter Ashton is the vice president of retail and self-directed investing for Recognia, the industry leader in providing global retail investors with actionable insights to make confident trading decisions. Ashton is directly responsible for empowering the trading community of over 20 million investors to which Recognia is provisioned by ensuring all aspects of the company’s client service delivery, including the distribution of in-depth investment research culled from Recognia’s patented investing analytics.
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4 Stocks Benefiting From the ‘January Effect’ originally appeared on usnews.com