Every Year Investors Profit Big On This Trade
While most investors are obsessed with the so-called ‘Christmas rally’, there is a trade tactic that plays out even more consistently. It’s called the ‘January Effect’ and every investor should understand and profit from it. The ‘January Effect’ works best in up years and is caused my tax loss selling at the end of the year leading into January of the new year. A beaten down stock (loser) is sold heavily in the final month of the year as investors look to offset profits and minimize taxes. This means that a stock that is already down for the year could go even lower into year end. However, it also signals that once tax loss selling is complete at the end of the year, there are almost no sellers in January of the new year. This means that a beaten down stock into year end will likely see a strong bounce higher in January, receiving the ‘January Effect’.
Think of it this way; if an investor is going to sell a beaten down name, they will do so into year end to offset taxes. If they do not sell it, they will not be looking to sell in January since there is no benefit at that point. This signals a major lack of sellers and allows even a few buyers to propel a stock higher.
Find a sector or stock that has been crushed and is trading near the lows of its chart while the overall market is hovering near 52 week highs. Make sure the stock does not have any immediate bankruptcy issues. A great example in 2019 is the marijuana stocks. These stocks are trading at all-time lows as traders sell to offset gains in a market that is up over 20% on the year. In January, these stocks will likely snap back significantly under the ‘January Effect’. Watch or look at stocks like Tilray (TLRY), Canopy Growth (CGC) and others.