Taking Advantage of the January Effect

There a few ways to take advantage of the January effect this year:

Small & Micro-Cap ETFs
The simplest would be to buy small cap stocks or ETFs before the year end and hold until they have a pop. Since the definition of “small-cap” has been continuously revised up over the past few years, it might be a good idea to look at “micro-cap” stocks. Here are a few ETFs:

• iShares Russell Microcap Index (IWC)
• First Trust Dow Jones Select MicroCap ETF (FDM)
• Powershares Zacks Micro Cap Portfolio ETF (PZI)
• Powershares Dynamic OTC Portfolio ETF (PWO)
• iShares S&P SmallCap 600 Index Fund (IJR)
• iShares Russell 2000 Index Fund (IWM)
• iShares Morningstar Small Core Index Fund (JKJ)
• SPDR DJ Wilshire Small Cap ETF (DSC)
• Vanguard Small-Cap ETF (VB)
• PowerShares Dynamic Small Cap Portfolio (PJM)
• PowerShares Zacks Small Cap Portfolio (PZJ)

Closed End Funds
Last week I mentioned a method to capture January effect alpha which uses CEF and specifically, municipal/bond CEFs. This year is a bumper crop for this specific strategy because of the vast number of these funds which have severe losses.

Value Line Futures Index
Yet another way to play the January effect is to use the Value Line Arithmetic Index futures. This is a little known equity index compiled by Value Line Inc. - the investment research outfit. It is comprised of approximately 1,650 stocks which are equally-weighted, as opposed to capitalization weighted as in the S&P 500 Index.

The futures for this index are traded at the Kansas City Board of Trade with each contract valued at $25 times the value of the index (appx. 1324). The Value Line January effect strategy is pretty straight forward:

Buy the Value Line contract (nearby month of course) and (sell short) equal value ratio of the S&P 500 Index. Close the position in the first week of January. Depending on the calendar, around the 9th of the month. That’s it.

This simple spread trade has a remarkably high profitability ratio but sadly it only comes once a year. And the advantage it has to the other two year end strategies is that it is market neutral. Although I suppose you could short SPY to offset a long position in small/micro-cap ETFs.

Comments

[bowater:]

I agree with your general theory of the "january effect". ETF's are good.

More money can be made with individual stocks. More work, more profit.

I don't think any ETF will be up 100% by January 15th,2009

But some stocks in the ETF will.

you must find those stocks.

here is how I proceed:
1) find a company that will not go out of business in the next 2 years.
2) make sure that the stock of this company was shorted at high prices during 2008.
3) this stock must be able to double from the current price and not
reach 50% of the 2008 high to be a candidate.

if you find ones that meets this criteria, you will have winners.


these are your big winners. the reason is simple: no tax loss selling in
January (selling pressure lifted) the shorts will cover because no taxes til
April of 2010.

I have been doing this since 1972.

2008 Dec 25 09:44 AM

[NOWHEREMAN:]

The January Effect worked for a simple reason. New money into Mutual Funds who had to put it to work by buying stocks.

It is well known and and people have gotten used to the concept of looking for beaten down December New Lows in search of the nugget which will rebound mightily.

Sell in May and go away worked this year inspite of the Fact that the Market Rises during Presidential Election Years. October Massacres spawn Bear Market climaxes but Not this year. The first year under a New President is the worst, anyone let you in on that theory?

Stock Market Almanac truisms all.

The reason I believe the January Effect will not work this time around, is the timing of December's Unemployment report. Another Theory is that the first 5 trading days in January define the entire month and As goes January, so goes the rest of the Year.

Putting faith into well known theories can lead to disasters just because they are well known.

IMO

2008 Dec 25 09:46 AM

[Prudent Man...:]

Where is the "new" money coming from. Jah, people are going to rush to buy mutual funds. Companies are not contributing to 401ks, etc. Also, the "January effect" is statistically indefensible in the first place as the sophists may make you believe.

This is CNBC/Bloomberg typical malarkey from people who know nothing but have top say something. You are going to invest on their word? If you do you deserve to lose money.

A good investment doesn't come about because of the calendar. It would be nice and easy, which the pundits like, but it is irrational as well as incorrect.

2008 Dec 25 10:19 AM

[bowater:]

the method i use(explained above) is not based on any theory.

it is based on fact.

what causes stocks to go down or stay down.....selling(profi... taking or tax loss selling)

in my examples of the picks in December, there is no profit taking, only tax loss selling in these.
almost no one takes a tax loss in January. so the selling pressure is off the stock.
the profit takers in January are investors that shorted the stock at high prices in the early part of the year. they are buyers covering their shorts.
this buying moves the stock higher.

if they shorted a stock at $10.00 and it is now $2.00, they cover.

Covering at $2.00 or $3.00 is fine. YOU buy at $2.00 in Dec and sell at $3.00 in Jan.
I have seen stocks that were $8.00 that are now .55 cents. o.k. companies. these could go to $1.00 or more.

2008 Dec 25 10:31 AM

[JOETRADER:]

YOU SEEM TO HAVE GREAT INSIGHTS. DO YOU MIND SHARING YOUR SCREEN CRITERIA WITH OTHERS?


On Dec 25 09:44 AM bowater wrote:

> I agree with your general theory of the "january effect". ETF's are
> good.
>
> More money can be made with individual stocks. More work, more profit.
>
>
> I don't think any ETF will be up 100% by January 15th,2009
>
> But some stocks in the ETF will.
>
> you must find those stocks.
>
> here is how I proceed:
> 1) find a company that will not go out of business in the next 2
> years.
> 2) make sure that the stock of this company was shorted at high prices
> during 2008.
> 3) this stock must be able to double from the current price and not
>
> reach 50% of the 2008 high to be a candidate.
>
> if you find ones that meets this criteria, you will have winners.
>
>
>
> these are your big winners. the reason is simple: no tax loss selling
> in
> January (selling pressure lifted) the shorts will cover because no
> taxes til
> April of 2010.
>
> I have been doing this since 1972.
>
>

2008 Dec 25 11:32 AM

[Totffe:]

Everything has changed. If you load up expecting a "January effect" you might get burned badly. Everyone is saying there will be an Obama inauguration rally. I say baloney. BO has said everything he has to say, and the bloom is off the rose. A smart tactic might be to just get on the sidelines for a few weeks, before going short again, but to bet long is asking for trouble.

2008 Dec 25 11:53 AM

[bowater:]

the fact that there is so much skepticism and worry about the January Effect, and theories about why or how it work is the very reason why my method works. My method is based on fact not theory.

Stocks go up and down based on buying and selling. other than trading on inside information, Dec and Jan trading is the most profitable.

the best trade is finding an IPO priced high in Jan of 2008 and now is Dec trading at 25% of the high.

It has a double tax loss because EVERYONE in the stock is short term.
It will bounce big in Jan 2009.

2008 Dec 26 09:09 AM

[bowater:]

one final statement: the january effect has little to do with Obama, earnings, any announcements about the economic condition, rates ,.

it is based on taxes.

2008 Dec 26 09:14 AM