In my Special Report “How to Protect Our Portfolio Without Selling Your Portfolio” (available to subscribers to my JubakAM.com site) I made the iShares Russell 2000 ETF (IWM) my third Portfolio Protection Pick. Today I’m adding it to my Jubak Picks portfolio.
The idea here is pretty simple: To make some money in the short term in 2018 and early 2019 from the January Effect Rally in small cap stocks.
From 1987 through 2017 the January Effect rally in small caps has delivered an average of more than 5% a year from December 15 through February 15. A short-term gain of 5% looks pretty good in the context of an “iffy” 2019.
Right now it looks like the January effect has started early this year–on November 1 in fact. I think that timing is almost certainly an artifact of the October plunge in small cap stocks. This fall the small cap stock sector has been hated, reviled and finally abandoned by investors and traders. The Russell 2000 small cap index was down 15.6% from August 31 to October 24. That all changed dramatically when the calendar flipped to November. In the first two days of November small cap stocks climbed 5.2%, outpacing all other U.S. stock sectors and indexes.
The causes of the January effect are hotly debated on Wall Street. It has something to do with mutual funds closing their books on October 31 and fund managers feeling more freedom to buy riskier stocks that no one has ever heard of since those holdings won’t be reported in end of the year portfolio statements. It has something to do with the end of end of the year tax loss selling–especially after an September and October like that of 2018. And it frequently–2018 is a good example–has something to do with bargain hunting as money managers try to pick up growth at low prices. This year there’s also the trade war factor. U.S. small companies do a relatively lower portion of their sales overseas than do big U.S. companies. Which makes the slowdown in overseas economies such as China less of a big deal to small company stocks.
I think the January effect rally in small caps is likely to stretch into February as usual. I’d look to take profits after that. A target price of $170, the high on September 25, 2018 and the high back in June is a reasonable guide for this trade. The shares closed at $154.64 on Tuesday, November 6.