By Mark Hulbert, MarketWatch
CHAPEL HILL, N.C. (MarketWatch) — Think small if you are hoping to exploit the January Effect this month. In fact, think tiny.
That’s because, to the extent this seasonal pattern works, it is concentrated in the tiniest of companies.
For the large-cap stocks that dominate the Dow Jones Industrial Average and the S&P 500, in contrast, the January Effect is hardly big enough to pay for transaction costs.
This should not come as a surprise, by the way. On the contrary, it’s right in line with the findings of the original academic research that, several decades ago, documented the existence of the January Effect. That research found that seasonal strength right after New Year’s tends to be concentrated among the stocks of the very smallest companies.
How small? If we apply to today’s stock market the criterion employed by that original research, a stock’s market cap would need to be less than around $200 million. That’s tiny. To put that in perspective, consider that Apple’s market cap is nearly $500 billion, or more than two thousand times larger.
January of a year ago provided a textbook illustration of the January Effect’s concentrated impact on the tiniest companies. The Dow in the first month of 2011 gained 3.4%. The iShares Russell Micro-Cap Index ETF /zigman2/quotes/203365365/composite IWC +0.72% , in contrast, gained 8.7% for the month, or more than double the blue chips. And the basket of 11 micro-cap stocks that I presented in my year-ago Trading Strategies column gained an average of 15.3%. (Click here to read my Jan. 4, 2012, column, “How to play the January Effect.”)
(To be sure, this 15.3% average return for those 11 micro-cap stocks is exaggerated, since it was calculated by comparing each stock’s closing price at the end of January 2012 with its last sale of 2011. Since all 11 stocks were relatively illiquid and had wide bid/ask spreads, an investor’s actual return would have been somewhat less.)
To arrive at this list of stocks a year ago, I turned to the Hulbert Financial Digest’s database of several hundred advisers’ model portfolios. I included just those stocks with a market cap less than $100 million that were recommended for purchase by at least two monitored advisers. Here is the list that the same methodology produces currently; I excluded ADRs, closed-end funds, and ETFs:
Dyadic Int’l /zigman2/quotes/205986917/composite DYAI +4.00%
Goldfield Corp /zigman2/quotes/204528377/composite GV +6.07%
Manitex Int’l /zigman2/quotes/203218902/composite MNTX +3.26%
Newtek Business Svcs /zigman2/quotes/202056729/composite NEWT -1.02%
Zogenix /zigman2/quotes/204255718/composite ZGNX -0.66%