The January Effect

                  In the beginning of January there is an inefficiency in the market called the January effect where small penny stocks spike quickly because tax loss selling is no longer there. A lot of beaten down stocks find bargain buyers in January. The up and down side to these plays is these are very speculative plays, unlike failed/end of run pumps. The thing to look out for our these beaten down plays that have great catalysts for a potential run-up, exciting product news, new partnerships, up coming news/events, etc. You need to realize that these are the worst performers of the year that are extremely oversold and many people are going to look to buy these stocks if there is decent catalyst that lift these up from there now extremely low price.

                 I have done some research on this and here is what Tim Sykes is paraphrased quoted saying from an old video lesson of his from about 4 years ago on this subject," The January Effect play is when a stock is beaten down, and has people that have bought the stock that are going to take tax loss before the end of the year, which means they will take tax losses in October, November, December. Taking these losses puts pressure on the stock. It is predictable that there is tax loss selling in January which means that you can anticipate that, and that usually brings out the buyers who are looking for bargains because its a new year, belief back in the company arises, and people think the company will come back. These companies that have been beaten down will spike very easily on little to no news. The January effect creates a lot of buying and a lack of selling because of the tax loss incentive. Selling is much less abundant during this time of the year. if you, the share holder, are going to sell a stock and it has a big loss you want to sell it in October, November, December, so that you can take the loss on your taxes for April of the following year. If you sell the stock on January 9th lets say, then you can not take that tax loss until the year after that so a lot of people don't want to sell beaten down stocks and similarly you don't want to sell stocks you have big gains on at the end of the year because strong stocks become stronger towards the end of the year. Although with strong stocks this doesn't happen as much because technically, tax losses are usually a greater motivator for selling than tax gains are, but you have to understand that the January effect is not predictable like many stocks and they are not an exact science."

             From my understanding the best way to play these stocks is to react to them as opposed to predict their spikes. This is common advice I have for anyone that wants to buy these beaten down stocks. Also if you are familiar with the technical analysis tool RSI, you can see that many of these stocks nearing the end of the year are oversold in the 40, 30, and 20s range. My take on the January effect is to use it to my advantage and to look for opportunities that arise because of it.

 

Thanks,

Max