Stocks Poised to Benefit from the January Effect

The Globe and Mail, Number Cruncher

By Peter Ashton

Friday, December 22nd 2017

In the Globe and Mail, Peter Ashton uses Strategy Builder to look for stocks poised to benefit from the January effect.

What are we looking for?

Canadian stocks that may benefit from the “January effect” next month.

Some stock pickers believe in a principle, known as the January effect, in which stocks rally at the beginning of the year. The effect is believed to be caused by stocks becoming oversold in December as a result of tax-loss selling and “window dressing” by portfolio managers. (Window dressing is the practice of selling losing stocks and buying winning stocks prior to the end of the year when a fund’s holdings are reported.) Stocks most affected by the January effect should be those that are trading lower in the month of December and therefore are candidates for tax-loss selling and/or window dressing. In addition, stocks that have sold off strongly are more likely to find themselves in an oversold position.

The Screen

We will be using Strategy Builder to search for Canadian stocks that may be poised to benefit from the January effect.

We begin by setting a minimum market cap threshold of$1-billion. Although the January effect should impact all stocks, portfolio managers are more likely to be holding mid-and large-cap stocks than their small-cap counterparts.

Next, we will look for stocks that have sold off strongly in 2017. We will select only stocks that have experienced price declines of at least 10 per cent year to date and at least 3 per cent of that in the past month.

Finally, we will use a technical analysis oscillator known as the relative strength index (RSI) to find stocks that find themselves in an oversold condition. Our screen will identify companies whose RSI has recently crossed above 30, signalling a bullish outlook.

What did we find?

Topping our list is gold miner Goldcorp. Its stock has struggled in 2017, down more than 13 per cent year to date. Despite beating analyst estimates for both revenue and earnings in October, Goldcorp has continued its slide in November and December, down 6.2 per cent in the past four weeks.

Calgary-based oil and gas producer Birchcliff Energy is one of many Canadian energy firms that have seen significant declines in 2017. Low oil and gas prices combined with shipping issues in Western Canada have combined to hammer Birchcliff’s stock price, now down 56.1 per cent year to date. On Dec. 18, the stock’s relative strength index crossed above 30, indicating a move out of the oversold range.

Hudson’s Bay Co. is a prime example of the challenges seen in the retail sector in 2017. Down almost 20 per cent year to date, HBC joins a raft of other struggling retail stocks driven lower by perceived competition from online firms such as Amazon. Window dressing by fund managers may be the reason for much of the selling of retail sector stocks such as HBC in December.

The investment ideas presented here are for information only. They do not constitute advice or a recommendation by Trading Central in respect of the investment in financial instruments. Investors should conduct further research before investing.