The ‘January Effect’
It’s been a busy month.
For the first time in a long while, stock prices are stirring upward in January. It’s a welcome change as we look back at how the market fared in the last 18 months.
Since the beginning of the year, stock prices have been soaring, with this action spreading like wildfire in both big and small cap stocks through optimism brought about by the string of favorable but still less ideal developments.
Through a continuous wave of advances over the past several weeks, the market has been tossing the benchmark index from one record high to another.
Of note, overall business has been largely driven by the typical combined trading transaction of what are called “recently upgraded stocks” as well as by “discarded or previously downgraded and/or long-while underperforming stocks.”
In particular, this month’s activity is led by relatively speculative issues that are now the focal point of heightened market play as they ride on storylines that lure investors to take risky but exciting ventures.
Among them are Asia Amalgamated Holdings (AAA), Active Alliance Inc. (AAI), Dizon Copper Silver Mines Inc. (DIZ), MRC Allied Inc. (MRC), United Paragon Mining Corp. (UPM), Wellex Industries Inc. (WIN), Philippine Estates Corp. (PHES) and Waterfront Philippines Inc. (WPI).
By the way, AAI was finally taken over by Enrique Razon Jr. with the sale of some 60 million shares (equivalent to 75 percent control) of AAI to his company, Prime Metroline Transit Corp., via a cross-sale transaction last Thursday at P3.33 a share, or for a total of P200 million.
Silent play
With the said transaction, AAI will now—as the speculative play was all about—“own” the hotel and casino project at the government-owned Bagong Nayong Pilipino Entertainment City Manila, currently undertaken by Bloomberry Resorts and Hotels Inc., a subsidiary of Sureste Properties Inc. which, in turn, is a subsidiary of Prime Metroline.
With the said takeover price, some investors are now asking if the closing price of AAI at P51.05 last Friday still makes sense. What do you think?
“Takeover” themes are likewise adding fuel to the current market activity.
PAL Holdings Inc. (PAL) and GMA Holdings Inc., through a round-about purchase of its Phil. Deposit Receipts (GMAP), are fingered as companies “about to be taken over.” San Miguel Corp. (SMC), on the other hand, is one issue said to be getting interesting because of its “takeover” for growth policy.
Both “takeover” themes, according to many market participants, are silently in play.
The incidental action of local and foreign investors to return to issues whose market prices had gone down but whose fundamental values continue to be intact, if not better, this year is further driving the viral activity of the market.
Many of these issues are mid- to big-cap issues like EEI Corp. (EEI), DMCI Holdings Inc. (DMC), Semirara Mining Corp. (SCC), Global-Estate Resorts Inc. (GERI), Filinvest Land Inc. (FLI), Ayala Land Inc. (ALI), Ayala Corp. (AC), Aboitiz Equity Ventures Inc. (AEV), Oriental Peninsula Resources Group Inc. (ORE), Trans-Asia Oil and Development Corp. (TA), SM Investments Corp. (SM), Philippine National Bank (PNB), Union Bank of the Philippines (UBP), Bank of the Philippine Islands (BPI), Metropolitan Bank & Trust Co. (MBT), BDO Unibank Inc. (BDO) and, of course, by the sheer business transaction on market leader shares Philippine Long Distance Telephone Co. (TEL).
With all of these current stock plays going on, I’m convinced that the market at the moment is experiencing what is known as the “January Effect.”
Past and present application
The January Effect is now simply defined as “a general increase in stock prices during the month of January” that gives rise to some trading opportunities.
Locally, this event looks relatively less fascinating among the various seasonal events closely watched by the general investing public for opportunities to beat the market.
However, this is a popular and closely followed calendar event among seasoned investors. It continues to reliably provide a good window of opportunity in the “hunt for even a fraction of a percent for extra performance,” to squeeze some earnings from the market.
The January Effect came about from the activity of investors to sell their stockholdings before the end of the year for tax purposes.
More explicitly, it was a practice by investors on Wall Street to avail of deductible capital losses from losing stock investment positions and offset capital gains taxes allowed by the US government.
Investors, then, sell on the last day of trading in December. On the first few days of trading in January the following year, they buy back in droves, so to speak, to re-enter the market.
Over time, the reason to sell at the end of the year for tax purposes slowly diminished since most investors have shifted to tax-sheltered investment plans.
But the anomaly continues.
Investors, especially institutional portfolios, do not only continue to get rid of their weak or risky stocks before the end of the year, they also sell their winners to show good yearend performance and buy back by the start of the year in the hope of catching them on lower prices and selling them again for profit.
This has made the January Effect to be known otherwise as the “Turn-of-the-Year Anomaly.”
But since its occurrence is founded more on logical principles more than ever, it is now hardly considered an anomaly.
Whatever it is, because it continues to be a reliable recurring happening, it has earned its place in the calendar of important seasonal events for investors to make some money early in the year.
Bottom-line spin
The January Effect is also different from what is called the “January Barometer” which, according to Wikipedia free encyclopedia, “is the hypothesis that stock market performance in January predicts the performance of the rest of the year.”
The January Effect continues to provide investors the opportunity to realize investment returns. And even if the circumstances to its occurrence are evolving, its continuity as a seasonal event is sure to stay.
Its occurrence this year is seen to be reinforced by the growing optimism of investors to enter and/or re-enter the market brought about by the promise of the New Year, particularly by this year’s Chinese Year of the (Water) Dragon.
Due to the increase in use by the general investing public to profit from the “January Effect,” it is also increasingly becoming difficult to use it as a trading strategy. For instance, profit margins become, at times, too slim. Inexperience and trading indecisions could lead to disastrous consequences.
The present “January Effect” may fade away soon as the month ends. That is why I have been recommending a “sell,” while I continue to advise a “buy” on the basis of fundamental value rather than on technical basis.
And believe it or not, I have a feeling that the present performance of the market this January could be representative of what the rest of 2012 will be.
(The writer is a licensed stockbroker of Eagle Equities, Inc. You may reach the Market Rider at [email protected], [email protected] or visit www.kapitaltek.com.)
