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The January Effect, The Most Powerful Trend!

Summary

The trend targets small and mid-cap stocks that have been crushed in 2014 for entry in late 2014 and early 2015. It's a 10 day trend.

It's been Profitable in 13 of 15 years running.

We use both Options and Equities and winners have been known to run 100%+.

I started my career as a trader in 1998 after getting pounded using a friend who worked for what we now call a "Boiler Room". I had a portfolio of companies that no longer exist, or perhaps they do but under some other labeling. Regardless, I was saving up my money to make an independent film called "Random Acts of Kindness" and was bartending and selling Sports Memorabilia at the time. And, I had saved a lot of money, particularly for a kid from Queens who ran away from home at 15 and lived for a time on a park bench, homeless and penniless.

But, "Pete", my no-longer friend, had put me in such illustrious companies as Big Smith Jeans. No offense to Big Smith, I mean, the dude (or dudess) may be very cool, but investing a lot of money in a company on the Bulletin Boards, as I'll discuss in future articles, is typically the land of the suckers, or speculators - not for someone trying to protect their money for other "higher" purposes. These weren't AAPL, or FB, or XOM, they were Pink for a reason. I always wanted to be a filmmaker and my script was a finalist at the Sundance Film Institute's Writer/Director Lab. In fact, the script ended up being optioned by Dennis Hopper before he passed away.

And yet, lo and behold, as fate would have it, all the Pink Sheet stocks (a step below Bulletin Board) that I was in, they all rocketed in 1998 when I first owned them and at least on paper I had made a pretty stellar profit of about 40% in less than 3 months. Well, I thought, with that kind of return, if I give Pete the rest of my money to invest I'll be yelling "ACTION!" in no time and my dream of being a filmmaker will be realized!

After the crash in October of 1998 the money that had taken me years to accumulate almost all disappeared, those once flying Penny Stocks were all grounded, broken wings and all.

GETTING ANGRY

At first I was very depressed. My dreams shattered, they died hard and I felt defeated. But, having grown up on the streets, having fought one too many fist fights with the entire 5th and 6th grades (and 7th) as a tough kid, I had learned to fight back - and when someone takes something from you...you find a way to take it back!

I got ANGRY!

MARIA

One day I was watching CNBC and Maria Bartiromo was talking about Day Trading, and she was also talking about how MSFT was set to report earnings and that historically MSFT stock rose into their earnings report in anticipation of them reporting strong profits.

TRENDS

Now, growing up I was big into numbers and statistics. I could add and subtract and multiple and divide up to 10 numbers with up to 10 digits each and get it right in my head in seconds sometimes. It's part of why I got into what at the time was the best High School in the country, Styvesant High School in NYC. Of course, I was also "good" at running away from an abusive home and I dropped out and took up space on that park bench in Prospect Park in Brooklyn.

Yet, I never lost my talent with numbers and trends and when Maria spoke of MSFT's TREND into earnings, I thought "HOPE".

And, I took that comment and ran with it, finding other trends that have worked for me and my clients first at Trendfund.com and now at AffinityTrading.com where I'm COO, and WorldSeriesofTrading.com where I am CEO. It also got me to the place where I authored (3) Books, one an International Best Seller, Rule the Freakin' Markets (St. Martin's Press, 2003), and appearances on every major Financial TV network and features in the Wall Street Journal, New York Times, Financial Times and many others.

THE JANUARY EFFECT

One trend that helped me secure an spot as a Master Trader and Educator of Traders is the January Effect. In fact, its been the most consistent, and most profitable Trend I've ever seen, played and profited from.

So, now that you know a bit about my story, I'll get into what the January Effect is, and how YOU can profit from it!

THE DOGS OF THE DOW ON STEROIDS...

A very popular and well known trend that some pundits will swear by is called The Dogs of the Dow. Basically, it's a trend whereby many investors and fund managers will simply buy the stocks in the DOW 30 that performed the WORST in the preceding year. So, if for example, GE performed poorly, or GM, or in 2014 pretty much any Energy Stock in the DOW, you'd just buy them on January 1st, with the thinking that they will rebound nicely in 2015, the following year.

And, that trend has historically been OK. In 2013 according to Motley Fool, the Dogs of the Dow stocks beat the S & P by 8.4% which is clearly a nice Ka-chingo!

In 2014, those stocks are trending as market beaters as well, though obviously the final stats are not in as of yet. We'll update that % at year end.

But, there's another Trend that I've found to be SO MUCH better that it's like Trend Trading Steroids.

The JANUARY EFFECT!

Now, I'll qualify this by saying that I didn't invent the January Effect, far smarter people than me did decades ago when they noticed that, similarly to the Dogs of the Dow, MANY stocks not in indexes, and some in other indexes outside the Dow VASTLY outperform the market AND even better for us traders, they do it in TEN DAYS!

Yup, the January Effect is a TEN DAY TRADE. I've made my entire year in those ten days at times, as have my clients.

So, what is the January Effect?

THE SET-UP

The January Effect gets set up because often times fund managers, and investors start dumping the stocks that have performed the worst on the year around November. By then if they are down 5, or 10, or often times 40 or 50% or MORE they have given up on recouping on these puppies with fleas.

So, they dump them, thus exacerbating the losses on those stocks. I mean, it makes sense, if you're a fund manager and you're trying to recruit new investors to invest with you, do you really want to show TWTR in your portfolio to end the year with TWTR down tremendously from 2013's highs? No, of course not, you want to own FB which is up some 50% instead, right?

So, all those stocks that have underperformed, and in fact gotten crushed in 2014 become fodder for exaggerated selling to close out the year, even if its not a fund manager looking to make themselves look better, it makes sense to sell your losers to offset your winnings on BABA for the year, right? Tax selling plays a huge part in setting up the January Effect as well.

THE PLAY

Now, every year I release my list of my Top (10) Stock and Top (10) Option Plays for the January Effect, and you are welcome to contact me to get that info, but if you wish you can also compile a list of your own and see how you do for yourself!

I usually break it down by taking the weakest stocks in the weakest sectors, and pick stocks that I feel have a good chance of funds RE-buying them when the new year starts. A stock like TWTR might qualify, or some of the Energy related names. I haven't compiled my entire list yet, but those are some preliminary ideas to get you started.

START AND END OF THE TREND!

I typically start buying these ideas right before Christmas, figure around the 20th. Sometimes I start buying a little bit earlier. My Free Class on the trend is December 10th and so I give out an idea during that then. I want to leg into the trend, I don't want to just buy 10 stocks and 10 options all in one day and be slave to the whims of the market the next day, or week. I want to buy some over the course of a couple weeks so if the market vacillates Up AND Down I don't get blown out on a single or two down days.

The official end date of the trend?

The 5th Trading day of the New Year. So, the 5th Trading Day of 2015, which is January 7th. That's the day I want to be out of almost all, if not all of my January Effect trades.

Now, I believe the proof is in the pudding, so we'll see what shakes out with this year's January Effect list, but overall we've gone 13 out of 15 winning years, with 1 of those years being a total loser when the market tanked, and 1 a break-even or small loser. The last 3-years have been remarkable for us, we've had many 100%, 200% and more winners with our Option January Effect ideas.

I expect this year's January Effect to prove fruitful. There are years when I am less confident, but I think there has been such a huge split amongst the "haves and have-nots" in terms of individual stocks, I believe a lot of the losers will catch up early in 2015.

And, I hope you'll hop aboard.

Have a Happy and Healthy Holiday and New Year Season!

Michael "Waxie" Parness

CEO WorldSeriesofTrading.com

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: We often trade in and out, separate from the January Effect some of the stocks listed in the article; TWTR, FB, AAPL, MSFT, BABA