The 2018 January Effect should lift a basket of 2017's biggest losers, offering a golden opportunity to shake off their laggard status and join the raging bull market. However, this long-observed seasonal event arrives with an expiration date, offering a limited time for the affected securities to attract the buying power needed to affect weak accumulation readings and generate full-year uptrends.
The January Effect begins when investors sell winners to incur capital gains taxes and use the capital to speculate on weaker performers. This positive feedback loop tends to dissipate by month's end, after the investing public completes its annual retirement fund allocations. Stocks that attract the strongest bids can then catch a second wind, adding to gains through the first quarter, while the balance lose stream and drift back toward downtrend lows. (See also: January Effect Revives Battered Stocks.)
Energy stocks could perform well during this bullish influence, with many sector funds ending 2017 in the red. Real estate investment trusts (REITs) may also attract committed buyers in 2018's higher inflation environment, after gaining a few 2017 points while sharply underperforming broad benchmarks. Finally, weak telecommunications plays could prosper, with merger fever and net neutrality repeal likely to underpin buying into the next decade.
Plains All American Pipeline, L.P. (PAA) posted an all-time high above $61 in September 2014 and sold off, completing a double top breakdown 10 months later. Selling pressure continued into the first quarter of 2016, dropping the stock to a seven-year low in the mid-teens. An oversold bounce stalled at the .382 Fibonacci retracement level in December of that year, giving way to a persistent decline that found support at the .786 bounce retracement in November.
The stock is now perfectly positioned to complete a double bottom reversal and enter a new long-term uptrend. The first upside challenge may come quickly, with the August 2017 gap still unfilled between $22.50 and $25.20. The stock will need to mount 200-day exponential moving average (EMA) resistance at the same time the gap gets filled, with a gap-into-gap the most likely scenario if January Effect buying pressure develops upside momentum. (For more, see: Why Energy Stocks Are Suddenly Hot.)
Residential REIT American Campus Communities, Inc. (ACC) builds high-quality student housing near major universities. It broke out above the 2013 high in the upper $40s in 2016 and hit an all-time high at $54.56 just one month later. A decline into the fourth quarter failed the breakout, yielding range-bound action into September 2017, followed by a secondary breakdown that has dropped the stock to a 23-month low near $40.
Price action has settled at the .618 retracement of the 2015 into 2016 uptrend, while the monthly stochastics oscillator has reached deeply oversold readings for the first time since 2015. This potent combination bodes well for a relief rally that tests steep resistance in the mid- to upper $40s. On-balance volume (OBV) has held close to the all-time high through months of selling pressure, raising the odds that the stock will eventually mount resistance and resume the 2016 breakout. (See also: College Housing REITs Are on the Rise.)
Sprint Corporation (S) has suffered through a series of near-miss merger opportunities but could now find a perfect suitor or increase profitability on its own merits. It rallied to a six-year high at $11.47 in 2013 and entered a steep decline that held just above four-year support at $2.10 in January 2016. A rally into January 2017 stalled within two points of range resistance, giving way to a downturn that has continued into December's 17-month low at $5.42.
The sell-off has reached the 50% rally retracement, while monthly stochastics has hit the deepest oversold technical reading since 2014. This alignment could trigger a bullish rubber band effect, with January buying pressure lifting the stock toward $8.00. Meanwhile, OBV has held above the multi-year midpoint throughout 2017, raising the odds that bulls will soon take control. (See also: Sprint, T-Mobile Merger Appears to Be Dead.)
The Bottom Line
The 2018 January Effect could lift these three beaten-down stocks, as well as other energy, REIT and telecommunications components. (For additional reading, check out: Stocks Could Rise as Much as 27% in 2018.)
<Disclosure: The author held no positions in the aforementioned securities at the time of publication.>