The January Effect: "Buy Stocks in November and Sell Them in January"

The January Effect: "Buy Stocks in November and Sell Them in January"

The January effect is a phenomenon that makes prices of certain stocks rise more in January than the market averages.

The January effect is a great money making opportunity for astute investors due to the FII factor.

The January effect occurs for two reasons. First, FIIs sell losing stocks prior to the year end to take capital losses on their foreign/domestic tax returns. The tax selling further lowers the prices of the stocks that are big losers for the year. Second, in January Wall Street professionals get big bonuses. Those with big bonus prefer bargain stocks and drive up the prices of the stocks that were losers the previous year.

Caveat:

1. This would be possible if they still hold the view that investing in `emerging markets' is the "in" thing to do in 2011.

2. Thirty years ago, one could simply buy depressed stocks in the last week of December. Now that the phenomenon has become well known, the time to buy is in November.

3. We live in a `Global Village' where a frog sneezing in Greece or a Casanova eating `Idly' in Rome causes the Sensex to tumble in Mumbai! Watch out for these `black swan' events ! That's your duty…certainly not mine!

3. The conventional wisdom is that this effect applies only to small stocks. Research says that the effect is not limited to small stocks but applies to depressed stocks in general.

Step- 1 : So you have to select stocks that may potentially benefit from the January effect. Let me help you start. Go to the NSE website. Pull down the individual indexes menus. See which stocks are more depressed than others. Make their list.

As a further help I have made the following chart for you for the NSE sector indexes:

Index on NSE	No. of stocks now below 35% over previous 52 weeks	No. of stocks now below 5% over previous one month
Nifty	13	3
Junior Nifty	20	5
Nifty Midcap 50	32 !	10
CNX IT	7	5
Bank Nifty	6	1
CNX Realty	6	1
CNX Infra	7	3
ETF	2	0
Gold ETF	None! All up by 40%	None! All up 6—8%

Now, the above chart is with respect to the National Stock Exchange (NSE) only. The other big stock exchange is the BSE, Bombay Stock Exchange. Go to BSE data base and do a bit of research and make a similar chart as above. Please note that the BSE has more specialized indexes. I found that BSE has the following sector indexes:

MIDCAP | SMLCAP | BSE-100 |BSE-200 |BSE-500 |SHARIAH 50 |BSE IPO |AUTO |BANKEX |CD |CG |FMCG |HC |IT |METAL |OIL & GAS |POWER |PSU |REALTY |TECk |

Did you notice the SHARIAH 50? Find out more on that or wait till the day I have some time to findout the details for you.

Step- 2: Now when you have identified the stocks listed in the sectorial indexes that fit your selection criteria you would notice that a Bank appearing in the list for Nifty also finds place in the Bank Nifty and the Sensex as well as in the Bankex. That would reduce your list of stocks for the weeding out step, the next step.

Step- 3: In the weeding out step, you have to remove from your list those stocks that have ruined their business models. Remember, some years ago plantation companies or dot.com companies were the favourites. Today they are best left alone. In this step you weed out carefully companies that have been exposed as con jobs or the ones that have become defunct due to financial scandals etc.

Step- 4: Next go to the NSE or BSE data-bases and find out the

a) Equity Base, the smaller the better;

b) EPS, the higher the better;

c) PE (price to EPS ratio), the smaller the better;  

d) Quarter-to-Quarter net-profit-increase percentages for last 3 quarters, the higher the better; perfect to have consistent increases in all 3 last quarters;

e) Quarter-to-Quarter Turn-over-increase percentages for last 3 quarters, the higher the better; perfect to have consistent increases in all 3 last quarters;  

f) Any other factor that you think is important.

For the stocks selected by you in step-3 above, make an excel sheet that contains the info collated in step-4 above. If you are lucky, you might get 3 or 4 stocks that meet the above criteria of step-4. If all stocks have experienced decrease in net-profits or decrease in top-line then use your vivek and bhuddi (wisdom, caution & intelligence) to grade your selected stocks.

Step- 5: Then the last step is to carefully allocate investable funds to the listed finalist stocks & buy them.

Harvesting:  Having thus invested in November, wait till third week or so of January or some later month, to get the opportunity to sell them for a God-willing annualized gain of more than 50% to 100% (this figure would depend on your stars and the selection of stocks that you made, plus of course the market conditions and other factors that influence such activity).

Disclaimer: It is naturally understood that users, if any, of above are advised to peruse & use it at their own risk and profit and only for their information and to rely on their own reason/judgment when making any investment decision.