By Ross Heart
Search “January Effect” and you will likely find a number of varying investing opinions, strategies, and explanations of what it means for the stock market. In my case, it has always meant crafting a year-end strategy to try to profit from the tendency of certain downtrodden stocks to “bounce” in the New Year after investors sold them off to harvest tax-losses as the previous year came to a close.
The theory suggest that the additional supply of shares from investors selling to realize tax losses places additional downward pressures to share prices, adding to share price declines, and then when that supply/selling subsides (i.e. after the 1st of the year when investors are no longer selling for tax purposes), shares of some of these beaten-down companies will naturally rise as tax-related dumping abates. A large ball submerged under water comes to mind.
Enter January Effect 2013. Every year this “effect” has varying success and each year’s market environment can dramatically influence its relevance. This year, the Fiscal Cliff may have flipped this strategy on its head. Due to anticipated tax changes, current investor behavior seems very contrary to normal years bringing into question the strategy’s application.
In light of the Fiscal Cliff, let’s first examine stocks that have performed poorly in 2012: beaten-down companies like Research in Motion (RIMM), Best Buy (BBY), Radioshack (RSH), JCPenney (JCP), and Advanced Micro Devices (AMD) come to mind for many active investors. It appears many downtrodden stocks are not experiencing declines into year-end however, but some have actually “bounced” going into year-end. May I suggest that investors are possibly delaying the taking of tax-losses prior to year-end, and that selling pressures these companies would normally experience are being postponed. Perhaps investors are holding off dumping their losers until next year and anticipate that the “value” of their losses will be larger due to tax changes next year.
Another dynamic – shares of companies with shareholders who’ve experienced massive capital gains over the years may now actually be the very companies experiencing year-end selling pressure. The most written about company potentially seeing this reverse January Effect is Apple (AAPL), as many analysts have pointed to investors selling shares to lock-in capital gains as a potential reason for part of their sell-off from recent highs.
How to potentially play these dynamics? First of all, I’m watching companies that have had large capital gains in tandem with investors selling into year-end to lock-in capital gains. These are my new “bounce” candidates as I’m anticipating the possibility of that tax-related selling subsiding. Secondly, I still have a list of “dead-stock-walking” type companies, but am now watching those stocks for potential early-year 2013 declines if investors quickly turn to harvesting losses early in the New Year. As with any strategy, flexibility and an open-mind are key.
The January Effect and other types of strategies are usually very short-term in nature and can result in varying successes. Interpretations of what constitutes beaten-down companies, timing, exits and individual situations can wildly affect results. I’m well aware of the inability and struggle in quantifying such ideas, but am merely trying to highlight dynamics that may exist within the markets, trying to exploit them and find any small edge in a very difficult environment for investors.
Disclosure: At the time of this writing Heart Capital did not hold any positions in any companies mentioned. None of the companies mentioned should be construed as candidates for any strategies, ideas or lists referenced and investors should conduct their own due diligence prior to any investement.
Heart Capital does not offer investment advice via this medium. Under no circumstance whatsoever do these postings, opinions, charts, or any other information represent a recommendation or personalized investment, tax, or financial planning advice.
Twitter: @heartcapital and @seeitmarket
