Free Lunch Update: Basket Beating Broader Market
By: Christopher Mistal
January 05, 2017
In recent years it has become rather common for the market to be down on the last day of the year and then down again on the first trading day of the New Year. The market was indeed down on the last day of 2016, but rebounded solidly on the first day (and second day) of 2017. However, today the market struggled which could be a sign that the market is slipping back into its recent, disappointing January pattern.
[January Seasonal Chart]
In the above chart, January’s performance for the recent 21-year period has been plotted. Of the five major indices only NASDAQ finishes the month with an average gain. After early gains, first two or three trading days, DJIA, S&P 500, NASDAQ and Russell 1000 tend to weaken and slip until the sixteenth trading day. The only reprieve has been a brief mid-month (eleventh trading day) bounce.
[Post-Election Year January]
However, past Post-Election Year Januarys have a substantially different pattern. Early gains are present, but the retreat afterwards comes to an end by the fifth, sixth or seventh trading day depending on index. From that low point the trend is sideways to higher by the end of the month with positive across the board average gains. If the major indices can shake of today’s minor setback and break out to new all-time highs, January 2017 will likely follow the much more bullish Post-Election Year January pattern.
Free Lunch Update
As a reminder, our “Free Lunch” (page 112 of Stock Trader’s Almanac 2017) strategy is a short-term trade that takes advantage of several yearend and New Year phenomena. Our research has shown that NYSE stocks making new 52-week week lows in mid-December, primarily due to yearend tax-loss selling, tend to outperform the NYSE through mid-February. These stocks are selected ahead of the Santa Claus Rally (page 114 STA17) and approximately near the start of the January Effect (page 110 STA17). 
Many of the stocks selected for the “Free Lunch” trade are down for good reason. Declining revenue and shrinking profits are most common amongst these names while others may have run into legal or accounting trouble. Once a name pops, profits should be taken and conversely if a name continues lower it should be cut loose quickly. This year’s basket has several familiar names from the consumer sector as well as biotech and healthcare.
Overall, this year’s basket is handily outperforming the NYSE Comp with a 9% average gain at yesterday’s close compared to 1.1% for the index. NASDAQ listed stocks, the largest portion of the list, are performing best, up 7.6% on average. The lone AMEX stock, HLTH was up 36.8% at yesterday’s close. Returns listed in the table below are calculated from their closing price on December 16 through their close on January 4. 
All of these stocks were added to the Almanac Investor Stock Portfolio using suggested guidelines for buy limits and stop losses. Due to the strict 5% trailing stop loss, updated daily using the position’s closing price, all but HBI, VSTO and AFMD have been stopped out. Closed Free Lunch positions and remaining open positions had an average gain of 4.4% as of yesterday’s close.
This basket appears to have some life left in it. We will officially continue to hold HBI, VSTO and AFMD in the Stock Portfolio with the previously mentioned 5% trailing stop loss.
[2016 FREE Lunch Menu of Bargain Stocks]
Disclosure Note: At press time, officers of the Hirsch Organization, or accounts they control held positions in ANF, CO, FIT, GES, HBI, VSTO, HLTH, AFMD, AMCN, FOLD, RKDA, ARWR, BIOS, EGAN, FCEL, OHRP, SHLD, TTOO and TVIA.