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- Use the January Effect for a potential 30% return:
Use the January Effect for a potential 30% return:
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Loading...The January Effect offers an opportunity to potentially make about 30% in three months. 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 75% of the time, broken even about 10% of the time, and lost money about 15% of the time. Odds favor that the January effect will be profitable this year.
Even though oil prices do not have much to do with solar power, solar-power stocks tend to track with oil. The chart shows the first down leg related to oil.The chart shows three more down legs related to balance sheet concerns.The background colors are based on one of our algorithms; red for bearish, green for bullish and blue for neutral.
Under one potential scenario, the stock dips and there is a fill at $2.00 in December. In January the stock bounces strong and the average exit is at $8.00.In this scenario, the return will be 300% in about a month or 3600% annualized.
Why did I start out the column by suggesting a return of only about 30%? Please read on for the answer.
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 bonus 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 has published a basket of 71 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 that the phenomenon has become well known, the time to buy is earlier. These calls to buy remain valid until about Jan. 10. On Jan. 11, consider canceling all open orders that have not filled. After Jan. 10, the securities on the list that have not filled are no longer valid recommendations and are withdrawn.
When to take gains
Typically, gains are taken in the period of 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. 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.
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