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The January Effect And Small Cap Stocks – Mike Swanson (12/21/2020)

There is a reliable trend in the markets that repeats just about every single year in which individual stocks that had been among the worst performing stocks in the entire stock market from the start of the year to roughly mid-December start to rally and continue to go up into the first week of January.

It’s called “The January Effect.”

The reason for it is that December often brings a big bout of selling in what had been lagging stocks in the first weeks of the month, because people who bought them earlier in the year year decide to sell them before the new year into order to turn paper losses into realized losses for tax losses purposes.

Sometimes there can be stocks that get hurt by this in the first half of December for no good reason. The selling isn’t happening because something is wrong with the company or the stock, but because many holders simply want to realize tax losses. It’s becomes a time when many will just give up on a stock for lack of patience.

This trend happens every year in at least a few small cap mining stocks were some strong ones continue to do well in December, but ones that even if they did go up in the summer get sold in December if they traded down in November.

That can bring a good buying opportunity on the Canadian stock exchanges, but most Americans who hear about this trend try to play it by buying beaten down stocks trading on the US markets for a 4-6 week trade.

Here is what to look for as far as a chart pattern goes if you are interested.

SMHI collapsed this year for massive losses. You can be certain that there have been people selling it in the past few weeks for tax loss reasons. The stock though has one sideways for a few weeks.

That’s the basic thing you want to look for – a stock that collapsed, but in recent weeks has been going sideways. You want to buy them just as they breakout.

I know nothing about this company or stock or own it, just using the chart as an example.

Here is another such example.

And another one.

I’m not looking to trade like this, just pointing how this type of situation works, because the pattern is fairly reliable.

One stock I do own is my top stock pick for December. It’s a Canadian small cap miner and I think is in a position not just for a few weeks, but for next year. You can find about it in my post on it earlier this month here.

If you are new to trading or investing grab my book Strategic Stock Trading.

-Mike

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