January marks the end of 2018 tax-selling season and the start of a potentially constructive period for thousands of issues beaten down in this brutally tough market year. Investors holding stocks with annual profits often wait to book gains in the new tax year, freeing up capital to build fresh exposure. It's also the period when many folks rebalance retirement portfolios while telling employers to set aside additional earnings.
This annual rotation, better known as the January effect, has the power to end long-term downtrends and bearish price action, often overnight. This phenomenon doesn't work with all stocks or happen every year, but 2019 odds are good because so many issues are saddled with 2018 losses. Even so, careful stock picking is needed, often requring choosing the most brutal declines rather than issues pulling back from multi-year highs like the majority of stocks after this year's early rally.
General Electric Company (GE) looks like a perfect choice in this regard, down 57% after losing 45% in 2017. The stock is now trading just two points above long-term support at the 2008 low following a horrific fourth quarter that followed the latest round of bottoming calls. Many shareholders got trapped in the capitulative decline and are using December to book losses, hit the sidelines and lick their wounds.
The stock hasn't posted a new low since bouncing at $6.66 on Dec. 11, suggesting minor resiliency. It might not seem like much, but the uptick has lifted the weekly stochastics oscillator out of the oversold level for the first time since October, establishing an intermediate buy cycle. In turn, this could indicate that the downtrend is running out of sellers, setting the stage for a January rebound that could reach the low teens.
Diebold Nixdorf Incorporated (DBD) stock had a miserable 2018, dropping an astounding 84% in reaction to a long string of profit and revenue shortfalls. The bottom dropped out in August when a big second quarter miss triggered a one-day 38% haircut, followed by an additional 30% loss in the next seven sessions. A bounce into November failed well below the big gap, ahead of new lows into year end.
The stock is trading at the deepest oversold level since 1985 while grinding through a narrow price channel at a 40-year low. It will take little buying power to lift out of the channel, setting off a modest buying signal that can be used for January trade entry. The real test will come at the Nov. 27 breakdown through four-month support at $3.55. A rally above that level would establish a stronger bull signal that could presage a bounce reaching the $5.00 to $6.00 price zone.
Nabors Industries Ltd. (NBR) saw a 72% share price decline in 2018, reflecting increasingly hard times in the U.S. oil patch despite all the hype about record production. The stock posted an all-time high at $50.58 in 2008, followed by lower highs in 2011, 2014 and 2017. The last uptick ended at $18.40 in January 2017, yielding a decline that found support 10 months later at the 2016 low near $5.30. It held that level into a November 2018 breakdown that has carried more than 65% into year end.
The stock carved a narrow declining channel into December, like Diebold, requiring little buying interest to set off a minor buying signal. That happened this morning, but it's hard to recommend taking exposure right here, with two more days of tax selling on the agenda. More importantly, price drifted sideways out of the channel rather than spiking higher and is showing little upside. Given this price structure, it makes sense to wait for a five-day high, which requires a bounce above $2.15.
The Bottom Line
The January effect could lift 2018’s most beaten-down issues, offering relief to long-suffering shareholders.
Disclosure: The author held shares of General Electric in a family account at the time of publication.