|Written by Rob Goldman|
Small caps and microcaps had a great week and with certain indicators in our favor, the current Santa Claus rally has real legs. See why stocks are not overbought, billions are sitting on the sidelines waiting to be put back into equities, and how their solid year-end returns should lead into an even stronger January. Plus, we define and describe The January Effect which has been an accurate market indicator for 29 of the past 35 years!
LET THE TRADING BEGIN
What a difference a week makes! Two weeks ago, the market looked weak and unsure of itself in the wake of sharply declining oil prices. Last week's comfort from the Fed and other external factors helped big caps pull a 180 while small caps and microcaps began their annual year-end ascent early, and in earnest. Although big volume did not begin to impact microcaps until Friday, the next couple of weeks should see some solid results due to the Santa Claus rally which leads into the well-known January Effect.
By the way, investors that missed last week's rally should not be kicking themselves. In fact, they should be glad. Despite the big moves higher last week, retail investor sentiment has not yet reached nosebleed levels. That means that the year-end tax selling is not yet finished. Therefore, this year's losers and sold-off stocks should begin to see some nibbling this week from bottom-fishing investors and traders since stocks are not likely overbought. Why?
Well, for starters. the AAII Sentiment Survey released last week showed that bullishness actually declined. Plus, all of sentiment percentages and ratios are generally in line with historical averages. This could signal that we did not yet enter an overbought scenario, although we are bound to have some down days.
Importantly, recent Lipper equity fund flow data indicates a lot of money waiting to be put to use which further confirms our thesis. For the past 2 recorded weeks (12/3/14—12/17/14) all equity outflows totaled $16B as compared with inflows of over $8B. This suggests that the major tax loss selling occurred in the previous 2 weeks and the cash from the sales could be soon moved to new equity fund investments.
The January Effect Explained
We talk a lot about seasonality because most investors' gains occur during big but short runs in the market, and oftentimes, these big runs occur from the last week of December through January of the upcoming year. This year it is a little different than most because of the surprisingly strong upward momentum in recent days. However, we believe it is representative of an early rally rather than the commencement of the January Effect. Instead, we believe that we have experienced a small Santa Claus rally that will morph into a sustained and broad movement.
There are multiple definitions associated with the January Effect and its related Santa Claus rally moniker. In a nutshell, the January Effect is an historical Wall Street moniker for the belief that small cap stocks outperform large caps from January through June, with the trigger based upon catalysts mentioned above. In fact, this event has occurred for 29 of the past 35 years, which is an 83% accuracy rate!
I have known some money managers and big-time traders that bought stocks in beginning in mid-late December during what is called the Santa Claus Rally, rode gains into the first half of the first quarter, sat on cash for a few months, and then started on the bike all over again.
The drivers of this phenomenon are easily understood. Now that we are in the last 2 weeks of December, virtually all of the institutional window dressing and selling have long since passed. Plus, all selling for tax purposes or the selling of small cap losers by individuals is ancient history. As a result, many small cap stocks are temporarily low prompting portfolio managers and individual investors alike to begin buying stocks with an objective of a 2-6 month holding period, based upon the risk/reward associated with current prospects and valuation of these stocks. Therefore, investors and traders should start making their list and checking it twice.
In the meantime, as you begin to build your list of potential buys, be sure to fill it with the big losers of 2014 that appear to be primed for a turnaround sometime next year and recent momentum plays of stocks that have just hit new 52-week highs. Pay particularly close attention to technology and consumer stocks along with industrials.
We will start to give you some of our own January Effect stocking stuffers on Tuesday.
With the Christmas holiday and New Year's Day occurring on Thursdays the next two weeks, we expect that volume could be very light on 12/26/14 and 1/2/15, which present a real buying opportunity for savvy traders. Also be aware that the markets will close at 1PM EST on Christmas Eve, 12/24/14.
From the entire Goldman Small Cap Research team, have a wonderful holiday season!
Launched in May 2010, The Goldman Guide is a free weekly publication of Goldman Small Cap Research and is written by Founder Rob Goldman with contributions from the GSCR contributor team. This non-sponsored investment newsletter seeks to provide investors with market, economic, political and equity-specific insights via an action-oriented, straight to the point approach. No companies mentioned in this newsletter are current sponsored research clients of the Company or its parent, unless noted, With rare exceptions, all companies or investment ideas mentioned in this publication are publicly traded stocks listed either on the NYSE or the NASDAQ. Goldman Small Cap Research members and contributors' bios, certifications, and experience can be found on our website: www.goldmanresearch.com.
This newsletter was prepared for informational purposes only. Goldman Small Cap Research, (a division of Two Triangle Consulting Group, LLC) produces non-sponsored and sponsored (paid) investment research. Goldman Small Cap Research is not affiliated in any way with Goldman Sachs & Co.
The Firm's non-sponsored research publications category, Select Research, reflects the Firm's internally generated stock ideas, along with economic, industry and market outlooks. In virtually all cases, stocks mentioned in Select Research offerings are listed on the NYSE or the NASDAQ. Publications in this category include the weekly newsletter The Goldman Guide, daily Market Monitor blogs, Special Reports, and premium products such as The 30-30 Report. Goldman Small Cap Research analysts are neither long nor short stocks mentioned in this newsletter.
Opportunity Research reports, updates and Microcap Hot Topics articles reflect sponsored (paid) research but can also include non-sponsored micro cap research ideas that typically carry greater risks than those stocks covered in Select Research category. It is important to note that while we may track performance separately, we utilize many of the same coverage criteria in determining coverage of all stocks in both research formats. Please view the company's individual disclosures for each engagement, which can be found in company-specific Opportunity Research reports, updates and articles.
Goldman Small Cap Research has not been compensated for any content in this issue.
All information contained in this newsletter and in our reports were provided by the companies mentioned via news releases, filings, and their websites or generated from our own due diligence. Economic, market data and charts are provided by a variety of sources and are cited upon publication. Stock performance data is derived from Yahoo! Finance. Our analysts are responsible only to the public, and are paid in advance to eliminate pecuniary interests, retain editorial control, and ensure independence.
The information used and statements of fact made have been obtained from sources considered reliable but we neither guarantee nor represent the completeness or accuracy. Goldman Small Cap Research did not make an independent investigation or inquiry as to the accuracy of any information provided by the Company, other firms, or other financial news outlets. Goldman Small Cap Research relied solely upon information provided by companies through filings, press releases, presentations, and through its own internal due diligence for accuracy and completeness. Such information and the opinions expressed are subject to change without notice. A Goldman Small Cap Research report, update, article, blog, note, or newsletter is not intended as an offering, recommendation, or a solicitation of an offer to buy or sell the securities mentioned or discussed. This newsletter does not take into account the investment objectives, financial situation, or particular needs of any particular person. This newsletter does not provide all information material to an investor's decision about whether or not to make any investment. Any discussion of risks in this presentation is not a disclosure of all risks or a complete discussion of the risks mentioned. Neither Goldman Small Cap Research, nor its parent, is registered as a securities broker-dealer or an investment adviser with the FINRA or with any state securities regulatory authority.
ALL INFORMATION IN THIS REPORT OR NEWSLETTER IS PROVIDED "AS IS" WITHOUT WARRANTIES, EXPRESSED OR IMPLIED, OR REPRESENTATIONS OF ANY KIND. TO THE FULLEST EXTENT PERMISSIBLE UNDER APPLICABLE LAW, TWO TRIANGLE CONSULTING GROUP, LLC WILL NOT BE LIABLE FOR THE QUALITY, ACCURACY, COMPLETENESS, RELIABILITY OR TIMELINESS OF THIS INFORMATION, OR FOR ANY DIRECT, INDIRECT, CONSEQUENTIAL, INCIDENTAL, SPECIAL OR PUNITIVE DAMAGES THAT MAY ARISE OUT OF THE USE OF THIS INFORMATION BY YOU OR ANYONE ELSE (INCLUDING, BUT NOT LIMITED TO, LOST PROFITS, LOSS OF OPPORTUNITIES, TRADING LOSSES, AND DAMAGES THAT MAY RESULT FROM ANY INACCURACY OR INCOMPLETENESS OF THIS INFORMATION). TO THE FULLEST EXTENT PERMITTED BY LAW, TWO TRIANGLE CONSULTING GROUP, LLC WILL NOT BE LIABLE TO YOU OR ANYONE ELSE UNDER ANY TORT, CONTRACT, NEGLIGENCE, STRICT LIABILITY, PRODUCTS LIABILITY, OR OTHER THEORY WITH RESPECT TO THIS PRESENTATION OF INFORMATION.
For more information, visit our Disclaimer: www.goldmanresearch.com.