I don’t know about you. But I’m all about starting 2014 off on a profitable note.

So forget about simply counting our profits as we coast into the New Year. It’s time to set ourselves up for even more.

How so?

We’re going to exploit a seasonal market opportunity. One that strategists at Barclays just confirmed provided “average excess returns” in the month of January… for 10 years running!

[ad#Google Adsense 336×280-IA]The only catch is, we have to act on this information in the next few days.

As you’ll see in a moment, the incentive to do so is bigger than it’s been in nearly a decade.

A Record Year for Profits

With one trading day left in 2013, the S&P 500 Index is up an impressive 29%.

The rising tide certainly lifted almost all boats, too.

According to the tally from Bespoke Investment Group, 452 stocks in the Index are in positive territory for the year.

That’s the good news. Now for the bad news…

Come April 15, 2014, investors will have to pay dearly for all those profits in the form of capital gains taxes. Much more so than in years past, too, since the capital gains tax rate jumped to 23.8% for the highest earners.

Ironically, that’s where our opportunity comes in…

Over the last few weeks, at the behest of their advisors, many investors have been “harvesting” losses. That is, they’ve been dumping shares of the losers in their portfolios to offset their capital gains – and, in turn, reduce their tax liability.

What’s more, this is occurring without any regard for individual company fundamentals.

If the stocks are down for the year, no matter how bright the prospects are for 2014, they’re being kicked to the curb.

The good news is, this indiscriminate selling naturally leads to artificially depressed prices (i.e., bargains), particularly in small-cap companies.

The bargains don’t last, though.

Multiple studies confirm that undervalued, small-cap companies perform best in January. The phenomenon is commonly referred to as the January effect.

As I mentioned before, Barclays found that these stocks handed investors an extra 2.4% in profits in January alone.

Meanwhile, MarketWatch’s Mark Hulbert found that the smallest 10% of stocks averaged a 7.9% return in January.

But in 2014, I expect the January effect to be even more pronounced. Here’s why…

A Rare Double Whammy

With so few stocks down this year, tax-loss selling opportunities are scarce.

Translation: The stage is set for “a double whammy for the stocks that the rally left behind,” according to Stifel Nicolaus’ Dave Lutz.

They’ll be sold off more. And that means they’ll bounce back more, too.

It won’t happen immediately, of course.

Tax laws – specifically the wash-sale rule – prevent investors from claiming the loss on the sale of a stock if they repurchase it within 30 days.

However, large institutions often start deploying capital aggressively at the beginning of the year. That means beaten-down small caps from last year tend to rally within the first few weeks of January. So what small-cap stocks hold the most upside potential for January 2014?

I’m going to hold off until tomorrow to reveal their identities. That way, we can be sure the tax-loss selling is done. Stay tuned.

And get some capital ready! When the market opens at 9:30 AM on January 2, you’ll need to be ready to pull the trigger!

Ahead of the tape,

Louis Basenese


Source: Wall Street Daily