Investors, John M. Keynes wrote: "are largely concerned, not with making superior long-term forecasts of the possible yield of an investment over its whole life, but with forecasting changes in the conventional basis of valuation a short time ahead of the general public."
But can investors consistently outperform the market averages just by foreseeing, i.e. timing the market. Most academic economists side with Malkiel's Efficiency Hypothesis Theory: "The past history of stock prices cannot be used to predict the future in any meaningful way. Technical strategies are usually amusing, often comforting, but of no real value."
However, the efficiency hypothesis theory has not discouraged stock market gurus from coming up with market anomalies that can deliver superior investment returns.
One of these anomalies is the "January effect," whereby out-of-favor stocks outperform in-favor stocks in the first month of the new year, with tax and window dressing offered as the most likely explanation. This means that investors who buy these stocks in the last two months of the current year can profit by selling them in the beginning of next year.
Here are two trades we have identified for this year's January effect:
1. Buy high-technology stocks that have been sold off in the last two months, as investors try to book profits ahead of higher capital gains tax rates associated with the Fiscal Cliff. Two of such stocks that stand out are Apple (NASDAQ:AAPL) and Google (NASDAQ:GOOG). Apple is trading close to 18 percent below its all-time highs, while Google is trading close to 11 percent below its all-time highs.
The future continues to be bright for both companies. First, they are the world's leading innovative companies that continue to churn out new products and services, creating new markets. Google introduced its own smartphones last quarter, Motorola's Droid Razr HD and Razr M, and Apple unveiled iPhone 5.
Second, they have been managing to monetize innovation, boosting their top and bottom lines, and are still trading at a reasonable PEs: Apple is trading at a forward (Sept 2013) PE of 12.52, while Google is trading at a forward PE of 15.30 (Dec 31, 2013).
Qtrly Revenue Growth (yoy)
Qtrly Earnings Growth (yoy)
*Fye Sep 24, 2013
+Fye Dec 31, 2013
Source: Yahoo Finance.com
2. Buy Chinese stocks that have been out of favor in the current year due to China's economic slowdown, though it shows signs of rebound in the last month. I particularly like Baidu (NASDAQ:BIDU) and Sina (NASDAQ:SINA), which have been unfairly punished, as they trade at reasonable PE and sound fundamentals.
Forward PE (December 2013)
Operating Margin (%)
Internet search engine
Media and mobile value-added services
E-Commerce China Dangdang Inc. (NYSE:DANG)
Business -to-Consumer e-Commerce
Renren Inc (NYSE:RENN)
Sohu.com Inc. (NASDAQ:SOHU)
Brand advertising, on-line gaming
* These statistics should be interpreted with caution, as Chinese accounting standards are different than those of the U.S. So they aren't comparable with those of their U.S. counterparts like Amazon.com (AMZN) and Google.
A few words of caution: As argued by Efficiency Hypothesis theorists, market anomalies cannot be profitably exploited, especially when they are well known to the investing public. Due diligence isn't a substitute for hype.