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I have been fortunate to generate significant profits from the January effect in 23 years out of the last 30 years. I lost money in four years and broke even in three years.
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The traditional definition of the January effect is that small stocks outperform market averages in the month of January. My experience is that the January effect is not limited to small stocks.
I have done significantly better than the followers of the traditional definition by simplifying the idea. The idea is to buy depressed stocks before the year end and to sell them between mid-January and early March.
Investors sell losing stocks at the year-end for tax purposes. This selling further depresses the stocks that are already big losers for the year. All an astute investor needs to do is to scoop the bargains on days when a stock gets dumped for tax reasons to abnormally low levels.
In January, Wall Street professionals get big bonuses. Further, new pension money pours in. This new money searches for bargains and zeros in on the depressed stocks which in turn start bouncing. As the technically inclined investors see big bounces from the lows, they jump on the band wagon further fueling the rise. By this time, analysts who had previously issued sell signals on these stocks panic and start upgrading. These upgrades bring in more money to these stocks and the bounce continues.
The idea is simple, but proper execution is not easy.
At The Arora Report, we are proponents of a basket strategy to reduce risk, i.e., buying a large number of stocks in small quantities. We have selected 73 stocks and 18 closed end funds that are likely to benefit from the January effect. Proper timing and proper selection from the first cut list by using a proven method such as the ZYX Change Method can easily increase the returns by as much as 100%.
Some of the stocks on our list at The Arora Report are PNSN, WFR, RIMM, ILMN, BAC, MS, GM, F, HPQ, GS, CLWR, CWTR, HGSI, DNDN, HCBK, NFLX, NTAP, PWER, JDSU, SONS, TLAB, MU, MRVL, NXPI, SWKS, NVDA, OVTI, RIG, CIM, ANR, PCX, SPWRA, TSL, STP, LDK, AONE, RF, SCHS, WBMD, ZIP, COCO, CECO, OZM, GSL, MVC, DGI, and CRY.
Just like a successful hunter stalks its prey, an astute investor stalks the stocks on the list and purchases only on abnormal down spikes.
About Me: I am an engineer and nuclear physicist by background, have founded two Inc. 500 fastest growing companies and have been involved in over 50 entrepreneurial ventures. I am the chief investment officer at The Arora Report which publishes four newsletters to help investors profit from change.
Disclosure: My hedge fund and I, as well as subscribers to ZYX Buy Change Alert, may be following this plan and have long positions in the stocks mentioned.
source: forbes.com
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