The Tycoon Report

Profit Huge as Small-Cap Rally Begins.

As we finish up the year and you are wondering what to expect from the stock market, keep in mind that we are going into what we call 'the January effect.' The first part of the January effect is essentially when we see the majority of the selling pressure at the end of the year on stocks that underperformed the market.

This happens as investors who own stocks that are under water sell those positions for a tax-loss which they use to either write off the year's gains, or to carry forward for future write-offs. Although the January effect is caused by individuals as well as institutions, the pressure on stocks due to tax selling comes mainly from the individual investors. The institutions play their part as they are generally trying to make sure that they don't get fired for having owned the biggest dogs of the year in their fund.

This is when money managers who have losses on their books in small cap stocks, which are considered to be more aggressive, cut their losses and re-invest that money into blue chip stocks. They simply wipe those aggressive dogs right out of their portfolio to highlight the quality names in their fund, or at least the winning (albeit lower quality) names for the year. 

After seeing the net effect of losing stocks selling off, particularly the small- cap stocks, you typically see a rebound -- partially because people who sold the down stock in their portfolios for a tax-loss get back in to the stock after waiting the mandatory 30 days to realize the tax-loss.

Another reason that you typically see a rebound is that the selling pressure has enticed the bargain hunters to step in and buy the sold off stocks. Small-cap stocks are historically the best performers on this rebound, as money managers and other institutions are willing to invest in more aggressive names in the end of December/beginning of January.

Historically, pushing the markets higher around January 1st is a great deal because of the retirement money being pumped into the market by Pension funds, Profit-Sharing plans, IRAs, 401ks and so on. Also adding to the January effect (which again has started in mid-December in recent years) are holiday gifts, year-end bonuses, and distributions.

Another fun fact to remember is that the January effect is usually strongest when the US dollar is strong, as we have witnessed this year. So be sure to keep an eye on oversold dogs if you are a bargain hunter. I have one small-cap internet stock in particular that I am focusing on right now that is down for the year. I think that the stock is poised to trade 22%-25% higher in the next 53 days. The CEO just bought $2.4 million worth of the stock at the current price, and he now owns over 4 million shares.

The option contract that I am going to recommend to my 'Trend Rider' members is poised to trade 135% higher by the end of January 2006. As an aside, since launching the members only service in September, we have not closed out one losing trade. Every single one of those trades has returned over 20%, and the average closed out trade has closed within 2 weeks. My biggest winner so far was up 48% in 4 days.

I would encourage you to check us out (see, 'Still Batting 1,000 ...' below). We offer annual and quarterly membership options that would make for a holiday gift that keeps on giving. Hope to see you there and Happy Holidays to you and yours.