From Wikipedia on the so called January effect:

“The most common theory explaining this phenomenon is that individual investors, who are income tax-sensitive and who disproportionately hold small stocks, sell stocks for tax reasons at year end (such as to claim a capital loss) and reinvest after the first of the year.”

In the modern market environment the January effect is essentially non-existent in large cap stocks, however, in micro-cap and nano-cap stocks the effect can be quite visible. This is because there is much lower liquidity available in smaller capitalization stocks and also because there are fewer institutional investors who focus on these names.

Historically, the trend in the junior resource space has been for stocks that have been appreciably lower on the year to see additional selling from investors for tax planning purposes during November and December. It is this ‘uneconomic’ selling at year end which, in theory, creates the January effect.

Over the last three years we have witnessed this phenomenon play out quite clearly in the TSX-Venture Composite:

Click to enlarge

CDNX_Weekly_11.17.2014

2011, 2012, and 2013 were awful years for junior resource investors and during each of these years the TSX-V sold off further during the 4th quarter of the year.

2014 stands to be different for a couple of reasons:

  • This is now year 4 of a brutal bear market which has seen many resource stocks decline by more than 90% – how many sellers are left out there?
  • September and October were terrible months for the resource stocks with many individual names being cut in half (TSX-V was down nearly 30% during September & October)

Our hypothesis is that micro-cap and nano-cap resource stocks will come under some pressure one more time before year end and this pullback will subsequently give way to a year end rally which will play out during the last couple weeks of December.

Important Tax-Loss Selling Dates:

Wednesday, December 24, 2014 is the last day for tax-loss selling for  Canadian stocks.

Friday, December 26, 2014 is the last day for tax-loss selling of U.S. stock for Canadian investors.

Wednesday, December 31, 2014 is the last day for tax-loss selling for U.S. investors for Canadian and U.S. securities.

Note: Investors must wait 31 calendar days before buying back any equity to take a tax loss on the security.

Tax loss selling can present an opportunity for astute investors. Historically the first quarter of the year has been strong for junior resource equities, buoyed by optimism of a new year, investment conferences, and steady news flow.

Last year numerous junior mining companies were up 40-50% in the first quarter.

A good example of this early year strength is Rubicon Minerals stock which more than doubled in the first 3 months of 2014.

Rubicontaxlosssellingchart

We are looking to pick up some of the highest quality juniors into any further pullbacks before year end.

Our favourite names to capitalize on 2014 tax loss selling will be covered exclusively in the next newsletter Resource Opportunities with Lawrence Roulston.