We're now less than two weeks from the start of 2021 and the long-observed January Effect, when investors turn their attention to the prior year's biggest losers and disappointments. The pool of big tech stocks meeting these criteria is smaller than usual, with the historic rally off the first quarter low lifting many issues to 52-week and all-time highs. Even so, this segment should offer a few profitable plays once the calendar flips into the new year.
- The prior year's biggest losers can benefit from January Effect buying pressure.
- The pool of big tech losers is small this year due to the historic rally off the March low.
- Three underperforming tech mega caps could turn the corner in 2021.
U.S. tax law underpins this seasonal bias, with the weakest stocks exposed to December selling pressure when investors seek to lower their liability by dumping big losers. This process reverses gears in January, with the same folks selling their winners, booking gains in the new tax year, and hunting for low-risk and out-of-favor plays. In turn, this makes the prior year's losers more attractive, with renewed buying pressure capable of initiating new uptrends.
Seasonality is a characteristic of a time series in which the data experiences regular and predictable changes that recur every calendar year. Any predictable fluctuation or pattern that recurs or repeats over a one-year period is said to be seasonal.
Dow component Intel Corporation (INTC) heads the losers list after an atrocious year that shed precious market share to rivals NVIDIA Corporation (NVDA) and Advanced Micro Devices, Inc. (AMD). Intel suffered from one self-inflicted wound after another in 2020, but management remains in denial, refusing or incapable of initiating needed reforms. However, this may not matter as much because the stock is being watched from all sides, with investors hoping to "pick the bottom."
Intel stock has lost 21% year to date and will complete a massive topping pattern if the current decline stretches into the October low at $43.61. However, long-term relative strength indicators have hit oversold levels just in time for 2021, suggesting that market players will jump back on board given the right catalyst. A simple admission of guilt could do the trick, especially if coupled with a few changes in the executive office.
Dow component Cisco Systems, Inc. (CSCO) has posted a modest 2% loss in 2020, but barring a last minute reprieve, this will be the first losing year since 2015. Market players have walked away from old-school tech in 2020 in favor of red-hot growth plays like Zoom Video Communications, Inc. (ZM) and DocuSign, Inc. (DOCU). However, there's a place for Cisco and other slow growers in a more sedate market environment.
The stock posted a 19-year high at $58.26 in July 2019 and entered downtrend that may have bottomed out at a two-year low in the low $30s in March 2020. A selloff into October got bought aggressively, posting a higher 2020 low that will evolve into a double bottom reversal if the current uptick reaches the August high at $48.29. This sentiment shift is easy to see on accumulation indicators, which have now popped to four-month highs.
International Business Machines Corporation (IBM) rallied to a two-year high and nearly ended a seven-year downtrend in February 2020, but the pandemic had other plans, triggering a vicious reversal that dumped the stock to the lowest low since 2009. It is down 7% for the year, which isn't too bad because it's now trading more than 35 points above the first quarter low. Even so, it will take more than hope to wake this former tech icon from the dead.
Price action since 2013 has carved a long trendline of lower highs, marking the line in the sand that IBM needs to cross to improve sentiment and set the stage for a new uptrend. It last reached trendline resistance just before the pandemic decline and looked ready to break out, but long-suffering shareholders just couldn't get a break. Even so, a January Effect rally could generate profits if price action closes the distance into that brick wall.
Market sentiment refers to the overall attitude of investors toward a particular security or financial market. It is the feeling or tone of a market, or its crowd psychology, as revealed through the activity and price movement of the securities traded in that market. In broad terms, rising prices indicate bullish market sentiment, while falling prices indicate bearish market sentiment.
The Bottom Line
Three old-school tech behemoths could offer profitable January Effect plays.
Disclosure: The author held no positions in the aforementioned securities at the time of publication.