The “January Effect” Predicts These Five Sectors Will Rise In 2018

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After the first week of 2017, the biotech sector rose 7% and the technology sector was up 2%.

By the end of the year, they had risen 47% and 32%, respectively.

During the same week, the retail industry was down 1% along with the energy sector. Retail closed 2017 up only 2% while energy finished down 4%. (See chart below.)

We saw a similar scenario play out in 2016.

Biotech had a terrible start that year… plummeting 14%. And the sector was flat the rest of the year… Meanwhile, the market was up 11%.

The best performer during the first week of 2016 was utilities. It finished the year up 15%—a big move for the slow-moving sector.

We call this phenomenon the “January Effect.”

You see, stocks that outperform the first week of January tend to perform well the rest of the year. And those that underperform during the first week of January tend to underperform the rest of the year.

This isn’t just an old market tale, either…

The First Five Days Indicator tracks the first five trading days of the year for the S&P 500. After the first five days of 2018, the S&P 500 was up 2.77%.

That’s great news for investors…

According to Jeff Hirsch, editor of the Stock Trader’s Almanac, that means there’s now an 83.7% chance that equities will rise for the year. He added that the indicator has correctly predicted the S&P 500’s annual direction in all but seven years since 1950.

Investment firm Standard & Poor’s also studied the January Effect over the past 90 years. And it found that when a stock was up in January, it finished the year in the green 73% of the time.

As you can see, the first week of trading is the most important week of the year. It’s a sign of what’s to come.

Today, I’ll show you five sectors that started off 2018 in the green. You’ll want to make space for them in your portfolio.

The January Effect Predicts Five Winners in 2018

The first week of 2018 is behind us and now we can make predictions for the rest of the year.

Here are the five that will get the biggest boost from the January Effect.

• Biotech and semiconductors

Both sectors rose over 5% during the first week of the year… and they should have a good year again. Strong sectors often stay strong.

(In fact, I’ve been bullish on both sectors since last year. You can read what I wrote in 2017 about biotech here and semiconductors here.)

The easiest way to take advantage of these sectors is the SPDR S&P Biotech ETF (XBI) and the VanEck Vectors Semiconductor ETF (SMH).

• Metals and mining

This sector started the year off hot. It was up 3.5% during the first week of the year.

Powered by a strong economy, I think this is the year we’ll see commodities break out. Commodities have been beaten down the past seven years. But based on the January Effect, that looks like it will change.

The easiest way to take advantage of this sector is the SPDR S&P Metals and Mining ETF (XME). This ETF ripped 20% higher in December and continued its run in January, rising 3.5% during the first week of 2018.

• Master Limited Partnerships (MLPs)

MLPs are energy companies. Most of them transport oil through pipelines.

The JPMorgan Alerian MLP Index ETN (AMJ) tracks this sector. It broke out of a downtrend in December and shot 4.5% higher the first week of January.

• Chinese stocks

Lastly, Chinese stocks caught my attention. The iShares China Large-Cap ETF (FXI) rose 5% and broke out to new multi-year highs in the first week of January.

Right now, we’re repositioning our portfolio to take advantage of these five trends. And that’s where we’re going to concentrate a lot of our research during the first part of this year. I suggest you do, too.

To recap, here are the five sectors I expect to do well and the simplest way to play them.

Nick Rokke, CFA
Analyst, The Palm Beach Daily

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