Last week, I showed you the two sectors that have made consistent, positive gains between Jan. 1 and Jan. 19.
While that's good to know, it's not everything…
And that's exactly why I'm going to reveal the two companies that could hand you the most lucrative opportunities this month. Now let's get started…
How the Straddle and Strangle Strategies Can Lead to Profits This Season
Since the start of the 20th century, data suggests that small-cap stocks are more prone to a "January Effect" than mid or large caps. I also found that this shift usually happened around the middle of the month.
If we're looking for a bullish pattern to play around the so-called "January Effect," it's definitely not during the first five trading days of the year – or even during the first 10.
There's something else going on…
As I mentioned, the Healthcare Select Sector SPDR ETF (NYSE Arca: XLV) and the Materials Select Sector SPDR ETF (NYSE Arca: XLB) are the only two ETFs in the S&P 500 that are providing majority bullish returns on investment (ROI). But that's not the full story. We need to know which companies to play in each of these ETFs.
We want to look for the stock in each fund that carries the most "weight," the company with the most gravity. After all, it's usually the case that as the biggest stock goes, so too does the entire ETF.
Currently, Johnson & Johnson is trading at or near its all-time highs (see chart below).
And, not to be outdone, DowDuPont is also trading at its highs (see chart below).
Although there is data to support the January Effect pattern theory in a general sense, I don't think this is it.
Not only are both companies large caps, the data also show that they continue their upward momentum long after the first five trading days of January. So there's another correlation going on here – another "effect" that we need to keep an eye on.
Beginning Jan. 15 and lasting until the end of February, there are about 50 S&P 500 companies releasing their fourth-quarter 2017 earnings results every single week. And two companies reporting right in between that range are – you guessed it – Johnson & Johnson and DowDuPont…
This is the real "effect" in January that we need to pay attention to because it will lead to major profits. This is what's called the "Earnings Effect."
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As companies begin to report their numbers from the last quarter of 2017, the results will dictate whether these current sky-high market prices and valuations are justified. We're falling right into the old investing adage of "buying the rumor and selling the news." And the data have shown that the Earnings Effect has definitely been coming into play in January for the last 10 years.
How these companies report will speak volumes about the current valuations.
But that also speaks to the risk in trading options through earnings season. A company could get great press leading into its earnings report (the rumor), but then report worse earnings than expected (the news), which generally causes a stock to tank.
Or a company could get horrible press leading up to its report, then wind up beating expectations.
So far this season, financial news networks have expressed confidence that, in general, companies will beat their earnings expectations by a larger margin than usual.
Johnson & Johnson and DowDuPont are no different. Historically, their value should increase this month. And analysts' expectations are positive. But that's still no guarantee, so we need to be smart about how we play the market at this time.
About the Author
Tom Gentile is one of the world's foremost authorities on stock, futures and options trading.
With more than 25 years' experience trading stocks, futures, and options, Tom's style of trading systems and strategies are designed to help individual investors propel themselves past 99 percent of the trading crowd.