2016 tax selling season draws to a close this week, replaced by January Effect seasonality that favors the prior year’s biggest losers. This rotational phenomenon should benefit social media laggards who have had a hard time translating 2016 page views into profits. Twitter Inc (TWTR) sits atop this underperformers’ list, dropping nearly 30% in the last 12 months compared to sector leader’s Facebook Inc’s (FB) 12% gain.

The worldwide web came to life in the 1990s with the promise that small businesses would thrive in the digitally democratic conditions, but big business has taken firm control in recent years. The Trump administration is likely to finish the job by replacing Net neutrality with a pay-for-play system that favors top providers like Verizon Communications Inc (VZ) and Alphabet Inc (GOOGL).

The shift to big business has also hurt smaller Net portals Bankrate Inc (RATE) and Pandora Media Inc (P), which continue to struggle near multiyear lows, but the flip of the calendar will trigger a major reset that favors fresh speculation. Companies viewed as takeover targets should post the strongest gains in those seasonally positive conditions, which will dissipate by the end of the first quarter.

TWTR

Twitter peaked at an all-time high at $74.73 in December 2013, just seven weeks after coming public in the mid-40s. The subsequent downtrend unfolded in multiple waves that reached an all-time low at $13.90 in May 2016. Acquisition rumors drove the stock higher into October, with aggressive sellers returning in the low 20s and knocking price back down to the mid-teens, where it’s likely to end 2016.

A bullish On Balance Volume (OBV) pattern reveals a large population of shareholders hoping for a profitable sale but CEO Jack Dorsey has disappointed them over and over again. Even so, January could instill new life, supporting a bounce that leaves a higher low in place. In turn, that would generate double bottom calls that could support a high percentage rally into the lower 30s.

P

Pandora Media topped out at $40.44 in 2014 and entered a downtrend that continued through 2015, depositing the stock within two cents of the 2012 all-time low at 7.08 in February 2016. The subsequent bounce stalled just above the 200-day EMA in July, yielding 3-month of testing, followed by an October breakdown. A higher November low has reawakened buying interest, but the stock is still trading in the red for 2016.

OBV spiked sharply higher in April and May after the company beat quarterly estimates and is now sitting near an all-time high. This marks a bullish divergence that should translate into sharply higher 2017 stock prices, perhaps driven by January Effect buying pressure. The next sign of better times ahead will unfold with a rally that fills the October gap between $14 and $19.

 

Bankrate came public in the mid-teens in 2011 and posted an all-time high at $25.95 in 2012. It then entered a severe downtrend that unfolded in multiple waves into the February 2016 all-time low at $6.59. The subsequent bounce has carved a two-legged advance, lifting the stock to a 10-month high that still hasn’t filled the massive February gap between $7 and $11.

The higher low posted in August could signal the start of an uptrend, but that won’t be confirmed until the stock ends the string of lower highs and lower lows with a rally above the November 2015 high at $15.80. OBV lifted above the level posted at that time in March 2016 (red line), signaling a major bullish divergence that should support higher prices in coming weeks.

The Bottom Line

Social media stocks have acted poorly this year, with a handful of big cap players taking the lion’s share of investment capital. The 2017 January Effect has the power to alter that equation and increase buying interest in 2016’s biggest sector losers. 

<Disclosure: The author held a long position in Facebook at the time of publication.>

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