the January effect

Mutual funds and ETFs typically have an operating year that ends on Halloween.  They do their year-end tax selling in September and October.

Other taxable investors, like insurance companies and you and me, have tax years that end on New Years Eve.  So  we all do our year-end tax selling in December.  We sell stocks we have losses in.

Smaller-cap, low share price, limited liquidity speculative stocks, which are mostly the domain of retail investors, are particularly hard hit during December.  Part of this is the volume of selling; part is marketmakers who are loathe to take on inventory and who can sense anxious sellers, dramatically lower their offers.

what it is

Just as there’s most often a November stock market rebound from mutual fund/ETF selling, there’s also typically a January rebound from December tax selling.  This is the January effect.

It has two parts:

–the losers from the prior December rebound.  Again, this is partly that new buyers appear, attracted by now-lower prices, partly that marketmakers respond by raising their bids.  Low share price speculative stocks normally lead the parade.

–investors of all stripes tend to defer sales of stocks where they have gains until the new calendar year rolls around.  This is also income tax-related.  If for no other reason than some investors want to trim the size of their winning positions, the prior year’s big gainers typically open the year poorly.

how long it lasts

The January effect usually lasts about two weeks;  some years, however, it goes on for most of the month.

this January?

This January my guess is that energy stocks, which have sold off heavily throughout 2015, will show at least a temporary rebound.  My worry about them, other than that current financials aren’t yet available, is that the seasonal low point for demand is still ahead of us.  That’s normally in late January-early February.

It may also be that the stars of 2015, like Amazon and Netflix, will take a step backward.

It will be interesting to observe how the new month starts out.

entering 2016…

Three thoughts:

–taxable investors sell losers in December, winners in January

This has something to do with strategy, as investors reshape their portfolios for the new year.  But it’s more about recognizing losses to count against this year’s income while nursing gains into the new year for sale so income tax on them is delayed.

As a result of tax-selling distortions, the first couple of weeks in January march to their own drummer.  Losers beaten down by tax selling rebound (more about this and the “January effect” in a few days); last year’s winners swoon for a short time.

Early January often presents an opportunity to buy interesting stocks a bit cheaper than otherwise.

–dividend stocks

If I’m correct that 2016 will be another so-so year for stocks–let’s say up 5% or so–then stocks with an above-average dividend yield should remain attractive.  Since they’re typically mature firms with more reliable income streams, they also provide some downside protection.

The current dividend yield on the S&P 500 is 2.04%.  I think anything 50 basis points or more above that is worth a second look.  This is one reason I’m holding on to Intel (-2.3% ytd in 2015) and Microsoft (+21.7%).

–sector rotation?

The year to date returns on the S&P sectors are something like this:

Consumer discretionary     +10.5%

Healthcare          +7.5%

IT          +7%

Utilities          -4%

Materials          -7%

Energy          -19%.

One could easily argue, purely on mechanical grounds, that the 30% difference in performance between Consumer discretionary and Energy merits at least some rebalancing away from the first toward the second in an active portfolio.

I’m not ready to to this quite yet.  I’d like to see yearend financials first.  But the numbers argue that we’re getting close to the time to act.



a normal start to the new year

a down day

Stocks sold of throughout the day yesterday.  Nothing unusual about that, especially after the strong performance of stocks on Wall Street last year.

My take is that this is taxable investors, predominantly individuals and not mutual funds or other taxable institutions, I think, who are rearranging the positions where they have gains.

what to do

Three things, other than rearranging your own holdings:

1  wait for the selling to abate  The amount of downward pressure on the market and the number of days it takes for selling to tail off will tell us a lot about the overall tone of the market.  Shallow and short are my guesses–but I’m content just to watch to see how tax-selling plays out.  It’s always possible that selling will begin to feed on itself and turn into a minor correction.  I don’t think so, but I find the twists and turns of the market nearly impossible to predict.  So my primary inclination is to watch and wait.

2.  analyze  Look for odd price action–either stocks that come under a lot of pressure or ones that are rising in a down environment.  Yesterday, the strength of TWTR really caught my eye, as did the up movement of SPLK, WYNN and LVS.  That’s bullish for all four (all of which my family owns).  I’m not looking to buy any of them right now, but if I were I’d be thinking I shouldn’t wait for them to dip before buying at least part of the position I was contemplating.  I know that’s not watching and waiting, but…

3.  shop for bargains  For example, I’m intending to add to my VZ before the merger with VOD happens.  So a several-day selloff in the former would suit me fine.  I’ve got one or two stocks earmarked for sale at slightly higher prices.  But if I could find a replacement at, say, 5% less than I’d expected to pay, I’d make the switch now.

Also, for anyone in the northeast US, try to stay warm.  It’s -9 degrees Celsius in New York now (colder in the suburbs).  It will be -15 tonight.  The wind is making it feel 5 to 8 degrees colder.  Brr!