This Seasonal Surge Can Bring In Huge Gains, but You've Got to Move Right Now

Wall Street loves the prospect of a tax bill landing on the president's desk this weekend. We're within striking distance of Dow 25,000 as I write this.

I think the markets are going to continue to soar from here, allowing for the prospect of a small pullback when and if traders try and "sell the news" of the tax bill becoming law.

More gains ahead... but some gains will be bigger than others, thanks to the "January Effect" - a phenomenon distinct from the "Santa Claus rally," but which is happening earlier and earlier every year.

I'll tell you all about it - and name the asset that's about to go ballistic because of the effect...

[mmpazkzone name="in-story" network="9794" site="307044" id="137008" type="4"]

This Can Get You a Huge Single-Month Edge

You may have heard of the January Effect, where small-cap stocks have historically outperformed their large-cap brethren during the month of January.

Fun Fact: This book will show you how you can amass $1 million or more by "working" in 10-minute increments once a week! Claim your free copy...

This big outperformance by the small caps was very clear in the second half of the 20th century, with Hirsch and Hirsch reporting in the Stock Trader's Almanac that small caps far outpaced big caps during January for 40 out of 43 years between 1953 and 1995.

During that time, small caps gave an absolute performance improvement that was staggering.

Seasonal surge

The Wall Street Journal reports a small-cap outperformance of 5.1% versus large caps during the decade of the 1970s.

Said another way, a $100,000 portfolio invested in small caps would return $5,100 more than one invested in only large caps during the month of January. That's a huge single-month edge.

Since then, it seems like everyone has jumped on this bandwagon, and the edge provided by this seasonal tendency has steadily diminished down to only a 1% edge in the 1990s.

However, there is good news (that is coming up fast upon us) on the small-cap outperformance front.

The Gains Start in December These Days

The January Effect is still working... it's just working a little earlier, that's all.

Here's what I mean.

Since the 1987 crash, moving the entry date back to Dec. 15 has worked wonders. The numbers show a small-cap outperformance from Dec. 15 to Dec. 31 of 85% (3.5% versus 1.9%).

So the edge hasn't diminished as much as it first appeared.

And the effect remains, albeit less strong, if held through the middle or end of January.

And since 2011, we've seen the small caps build on that outperforming tendency, with five out of six years showing modest to strong outpacing.

In short, this is a seasonal tendency with a strong track record that is built on a broader foundation of overall "Santa Claus rally"-style market strength in December.

Like all seasonals, it won't work every year, but the January Effect demands a closer look coming off a year of 20% or more gains on the S&P 500.

There are a couple of ways to play this easily - the iShares Russell 2000 ETF (NYSE Arca: IWM) gets you the broadest exposure to small caps, while the iShares Core S&P Small-Cap ETF (NYSE Arca: IJR) tracks the S&P Small Cap 600 index.

In my paid research services, we'll be playing the extremes these small caps exhibit over the next few weeks with some fast-moving, high-profit-potential trades.
Can a Single Book Make You a Millionaire? This book will show you how you can amass $1 million or more. The best part is you only have to "work" in practically effortless 10-minute increments once a week! Claim your free copy...

Follow D.R. on Facebook and Twitter.

About the Author

D.R. Barton, Jr., Technical Trading Specialist for Money Map Press, is a world-renowned authority on technical trading with 25 years of experience. He spent the first part of his career as a chemical engineer with DuPont. During this time, he researched and developed the trading secrets that led to his first successful research service. Thanks to the wealth he was able to create for himself and his followers, D.R. retired early to pursue his passion for investing and showing fellow investors how to build toward financial freedom.

Read full bio