Bargain Stock Free Lunch Licks
By: Jeffrey A. Hirsch
December 23, 2014
The Santa Claus Rally is scheduled to start tomorrow. As defined on page 114 of the Stock Trader’s Almanac 2015 SCR is the last 5 trading days of the year and the first two of the New Year. As tax-loss selling abates and retail investors revel in holiday cheer, the pros left on The Street gobble up bargains and drive the S&P up an average of 1.5% over the 7-day period. Yale Hirsch discovered this phenomenon in 1972. But its real value is as an indicator. Santa’s failure to show tends to precede bear markets, or times stocks could be purchased later in the year at much lower prices. To wit: “If Santa Claus should fail to call, bears may come to Broad & Wall.” 

In 1999-2000 the period suffered a horrendous 4.0% loss. On January 14, 2000, the Dow started its 33-month 37.8% slide to the October 2002 midterm election year bottom. NASDAQ cracked eight weeks later falling 37.3% in 10 weeks, eventually dropping 77.9% by October 2002. Saddam Hussein cancelled Christmas by invading Kuwait in 1990. Energy prices and Middle East terror woes may have grounded Santa in 2004. In 2007 the third worst reading since 1950 was recorded as subprime mortgages and their derivatives lead to a full-blown financial crisis and the second worst bear market in history.

This is the first indicator to register a reading in January. The seven-trading day period begins on the open on December 24 and ends with the close of trading on January 5. Normally, the S&P 500 posts an average gain of 1.5%. The failure of stocks to rally during this time tends to precede bear markets or times when stocks could be purchased at lower prices later in the year. 

On January 8, our First Five Days “Early Warning” System will be in. In pre-presidential election years this indicator has a solid record. In the last 16 pre-presidential election years 12 full years followed the direction of the First Five Days; however, 2007 and 2011 did not. The full-month January Barometer has an even better pre-presidential-election-year record as 14 of the last 16 full years have followed January’s direction. 

Our flagship indicator, the January Barometer created by Yale Hirsch in 1972, simply states that as the S&P goes in January so goes the year. It came into effect in 1934 after the Twentieth Amendment moved the date that new Congresses convene to the first week of January and Presidential inaugurations to January 20. 

The long-term record has been stupendous, an 87.7% accuracy rate, with only eight major errors in 65 years. Major errors occurred in the secular bear market years of 1966, 1968, 1982, 2001, 2003, 2009, 2010 and possibly 2014. The market’s position on January 30 will give us a good read on the year to come. When all three of these indicators are in agreement it has been prudent to heed their call.

Lunch Licks

Some rather tasty morsels were served up in the list of stocks hitting new 52-week lows last Friday. From the initial batch of about 78 stocks on the NYSE, AMEX and NASDAQ that made a new 52-week low we boiled it down to 17 choice selections for our 2014 FREE Lunch Menu of Bargain Stocks. After we eliminated preferred stocks, funds, splits, special high dividends and new issues we cut stocks trading below $1.00. The remaining stocks had to average at least 25,000 shares per day over the last three months and have a market cap of at least $20 million. Finally, any stock that was not down 30% or more from its 52-week high to the 52-week low reached on Friday were also eliminated.

Unlike previous years, we suggested specific buy limits and stop losses for each stock included and the trades will be tracked in the Almanac Investor Stock Portfolios.  It turned out to be a surprisingly diversified group of companies and several receive high marks from rating agencies. The market’s rally off last Tuesday’s low and the rebound in the energy stocks reduced the number of oil-related shares making new lows on Friday. Though there are two Oil & Gas Royalty Trusts on the list. The biggest group representing is three from the big winner of the year yet recently beleaguered biotech sector.

The remaining dozen: International Restaurants, Israeli Cellphone Services, Apparel Manufacturing, Metallurgical Coal Miner, Specialty Steel Manufacturing, Online Dating, Chinese Internet, Travel, Solar, 3D printer, HVAC & Compressor Manufacturing and Medical Products. We were able to get a position at our suggested buy limits or better in all but three stocks so far. Hanwha SolarOne (HSOL), Spark Networks (LOV) and Tecumseh Products (TECU) all ran up and never traded at or below our buy limits. Amazingly, TECU was up 87% at one point today – 130% more than Friday’s close. But you can’t get them all.

[Free Lunch 2014 Table]

Please remember, this “Free Lunch” strategy is not for the faint at heart. It is a quick, short-term strategy for sophisticated nimble traders. Folks tend to get rid of their losers near yearend for tax-loss purposes, often driving these stocks down to bargain levels. Over the years we have shown (STA 2015, page 112) that NYSE stocks trading at a new 52-week low on or about December 15 will usually outperform the market by February 15 in the following year. In the past 15 years we have added stocks from AMEX and NASDAQ and found that the most opportune time to compile our list is on the Friday of December triple witching which often further depresses already distressed equities and leaves plenty of time to capitalize on the Santa Claus Rally and January Effect.

If you buy these stocks, please note the following:
1. Consider selling them as soon as you have a significant gain and utilizing stop losses. 
2. The stocks all behave differently and there is no automatic trigger point to sell at. 
3. Standard trading rules from the Almanac Investor Stock & ETF Portfolios do not apply for these stocks. 
4. We think you should be out of all of these stocks between the middle of January and the middle of February. 
5. Also, be careful not to chase these stocks if they have already run away.

DISCLOSURE NOTE: At press time officers of the Hirsch Organization or the accounts they control, held positions in ARCO, BIND, CCIH, CEL, EPAX, IMGN, OGXI, OXM, SJT, SSYS, TNDM, WHX, WLT, and WOR.