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January Effect Is Favoring Lower Priced Stocks

With tax-loss selling over, there is stronger action in small stocks and those near lows.
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The market started the year with some classic January Effect action. Small-caps, growth stocks, and the worst-performing names in 2021 bounced as tax selling, and portfolio positioning pressure cooled. Big-cap names saw some profit-taking, and names that enjoyed a surge into the close on December 31 suffered some reversals.

At the end of the year and the start of the new year, much of the action is driven by positioning moves that have little to do with fundamentals. The flows in and out of the market and between sectors are mostly a function of getting in position for what may unfold down the road.

There are two major macro issues right now that aren't having much market impact. The first is the surging number of Omicron cases. The market seems to have taken the view that there will be a huge surge but that it will peak quickly and will not be as severe as many fear. There are some economic interruptions in industries like travel, but the market is looking past this and anticipates that Covid may be winding down in part because Omicron is so mild and contagious.

The other macro issue is interest rates and inflation. The 20+ Year Treasury Bond (TLT) continues to drop as yields rise, but the market reaction to this is quite mild at this point. The Fed has made it clear that it is going to be more hawkish this year, but so far, the market is not too concerned. The yield on the five-year bond is hitting its highest since February 2020, but the yield curve is the key, and that is keeping the market calm

From a trading standpoint, the big issue is whether there will be a continuation of favorable stock picking in small-caps, biotechnology, and other groups that lagged last year. There was a large number of lower-priced stocks that made bigger moves yesterday, which reflects stronger speculative interest. I will be looking for a continuation of that theme.

Earnings season is still several weeks away for most stocks, but there are indications that market players are starting to focus on fundamentals again as the end of the year pressures and position moves start to fade away.

We have a positive start on the way, with cryptocurrencies finally seeing a little better bounce.

At the time of publication, James "Rev Shark" DePorre had no position in the securities mentioned.