If you're looking for a cheery reason to ring in the New Year, the "January effect" could be the very thing to keep you on your toes.
The January effect is a phenomenon that makes prices of certain stocks rise more in January than the market averages. It presents a unique money making opportunity for astute investors, says Nigam Arora of Market Watch.
How it works...
Two events theoretically cause the January effect: Firstly, at year's end, investors sell losing stocks to better their tax returns. The mass sell-off lowers prices of these loser stocks.
Secondly, come January, Wall Street professionals can expect to receive their long awaited bonuses. Bonus season puts a significant amount of money in the hands of individuals likely to invest in the market, and bargain hunters seek out depressed names, such as those sold off in December. The renewed demand theoretically brings the prices back up.
The casual investor can usually capitalize on this January effect by searching for and buying up depressed stocks in December and then selling, with proper timing, in January.
However this technique is not fool-proof. Arora himself claims to have lost money with this trick 15% of the time (success rate: 75%, broke even: 10%).
Arora also says the game is changing. "Thirty years ago, one could simply buy depressed stocks in the last week of December. Now that the phenomenon has become well known, the time to buy is in November."
So, how do you go about finding stocks that might benefit from the January effect?
To create this list, we started with a universe of about 180 stocks that have seen significant losses over the last year, in addition to accelerating losses over the last month.
In other words, price action suggests that many of these stocks are being sold to harvest tax losses.
To refine the list, we collected data on insider buying, and identified a list of names that have seen significant buying from insider executives over the last year.
Theoretically, insiders know more about their businesses than anyone else, so if they're using their own money to buy the shares of their employers, you better pay close attention.
Recent price action suggests these names are being sold to harvest tax losses, and insiders seem to think these stocks are ready to benefit from the January effect -- do you agree?
List sorted by monthly performance. (Click here to access free, interactive tools to analyze these ideas.)
List compiled by Eben Esterhuizen, CFA:
4. Jefferies Group
5. Overseas Shipholding Group
6. Vantage Drilling
7. Pacific Capital Bancorp
8. Fortress Investment Group
9. American International Group
Interactive Chart: Press Play to compare changes in analyst ratings over the last two years for the stocks mentioned above. Analyst ratings sourced from Zacks Investment Research.
Kapitall's Eben Esterhuizen and Rebecca Lipman do not own any of the shares mentioned above. Insider data sourced from Yahoo! Finance.
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