Stock Portfolio & Free Lunch Updates: January Effect Fading By: Christopher Mistal | January 11, 2024 | Email | Print

When we prepared the monthly January Almanac Issue in late December, we noted that January has been weaker in election years and January’s overall historical strength has been fading due to declines in thirteen of the last twenty-four years. January’s recent weakness, since 2000, also appears to be having an impact on the “January Effect.” In the 2024 Almanac on pages 112 and 114 the January Effect is defined as the tendency for small-cap stocks to outperform large-cap stocks from around mid-December through mid-February (mid-month uses the 11th trading day close of the month). In the Almanac we use the Russell 1000 as the large-cap benchmark and the Russell 2000 as the small-cap benchmark. Small-cap outperformance occurs when the Russell 2000 gains more than the Russell 1000 or when the Russell 2000 declines less than the Russell 1000 from mid-December through mid-February.

 

 

In the above table we have the full history of the “January Effect” along with the performance before and after 2001. This year as of the close on January 10, 2024, is included in the table, but is not used in Average, Median, and % Higher stats as the full period is not complete. When comparing the years 1979-2001 to 2022-2023 there has been a decline in the average small-cap advantage and frequency of occurrences. The average advantage has slipped from 3.41% to 1.10% while frequency has fallen from 81.8% to 63.6%. The “January Effect” is still happening, it is just not as pronounced or as consistent as it once was.

 

One likely reason is the notable weakness in January that also began in 2000. Another likely contributing factor is the rise of exchange-traded funds (ETFs) and index-based investing styles. Concentration of market leadership is another potential factor. The Magnificent 7 (Apple, Alphabet, Microsoft, Amazon, Meta, Tesla and Nvidia) is the current example. Before the “7” it was FAANG, FANG, FAAMG, MAMMA and going back even further, the Four Horsemen (late 90s and again in 2007). Undoubtedly there are even more possible reasons. Nonetheless, the Free Lunch strategy has historically benefited from the “January Effect” and languished when it did not materialize.

 

 

Free Lunch stocks got off to a reasonable solid start with 10 of the 13 positions posting a gain through the market’s close on January 2. [We provided a quick update in our member’s only webinar on January 3. The update is on slide 20 here.] One stock was unchanged and two were down. Overall, the entire basket had an average gain of 8.9%. Since that update chopping trading has weighed on Free Lunch stocks. Average performance across the entire basket has slipped to 1.8% (open position average is 6.0%), five positions have been stopped out (four for at a loss) and two of the remaining eight positions were modestly negative as of yesterday’s close. NASDAQ listed positions have outperformed NYSE positions and the entire basket was up 1.8% compared to a 1.3% NYSE gain and 1.1% NASDAQ Comp advance as of the close on January 10.

 

Two standouts are 374Water (SCWO) and Largo (LGO). Prior to getting stopped out, SCWO traded from $1 per share on December 20, to over $2 on December 27. A potential 100%+ gain in four trading sessions. As is often the case, those gains faded nearly as fast as they were produced as SCWO traded as low as $1.06 on January 5. LGO’s gain arrived at a slower pace and could be ending as shares declined over 7% today. 

 

As a reminder, Free Lunch stocks are not intended to be held for long. Should a sizable profit present itself, do not hesitate to lock it in. The exact definition of a sizable profit is yours to decide. We will continue to hold the eight remaining positions with the suggested 15% trailing stop loss based on closing prices. The market has been choppy, but it still appears to be consolidating sizable Q4 gains. 

 

 

Over the past four weeks through yesterday’s close (January 10), S&P 500 climbed 1.6% higher while Russell 2000 gained 1.2%. Over the same period the entire stock portfolio advanced 1.9% excluding dividends, any interest on cash and any trading fees. Small-cap portfolio positions performed the best, up 14.9% on average. Mid-caps were second best, up 1.7%, while Large caps itched 0.3% higher. Of the 20 new trade ideas presented in November, 14 are higher (10 up double digits), 6 are in the red and the average gain of all 20 is 11.0%.

 

The top performing trade from last November is still Virco Manufacturing (VIRC) up 78.5% at yesterday’s close. Mama’s Creations (MAMA) is second best from the November basket, up 37.6%. Gains by VIRC and MAMA were the primary driver of the double-digit gain in the Small-cap portfolio over the past four weeks. VIRC and MAMA are on Hold.

 

Amneal Pharmaceuticals (AMRX) is another standout from the November basket, up 31.5%. Aside from the solid number of new products brought to market last year, AMRX moved from the NYSE exchange to NASDAQ in late December. With the move it was added to the NASDAQ Comp and NASDAQ Biotechnology indexes. AMRX is on Hold.

 

At the other end of the performance spectrum, Grand Canyon Ed (LOPE), was hit by a lawsuit from the FTC in late-December. The initial selloff turned a modest gain in the portfolio into a loss. The outcome of the suit is not likely to be known anytime soon and when that happens the most likely outcome will just be a fine. LOPE is on Hold.

 

All existing positions in the portfolio are on hold. Please note that some stop losses have been updated. The New Year is off to a choppy start and January has historically been softer in election years, but thus far there has not been any meaningful change in fundamental data. Employment data is still reasonable firm, inflation’s sluggish cooling trend continues, and economic growth is holding up. Fed rate cut expectations are adjusting after getting overly optimistic.