“January Effect” Setting Bank Stocks Up for a Powerful 2018

Gavin Magor

If you had to make a bet, and you knew that 37 times out of 39 you would win, how much money would you wager?

After all, this isn’t a coin flip, some 50/50 probability game. This is tossing the coin 39 times and only missing twice.

All in? Every cent in your portfolio? Probably not, just in case. But I’m sure you’d like a chance at that kind of bet!

Well, that’s the track record of the so-called “January Effect.” It argues that a solid overall stock performance in the first month of the year points to a bullish annual performance for the whole market.

It has worked 37 out of 39 times since 1950. How’s that for good odds?

What’s more, a “down” January doesn’t necessarily point to a bad year ahead, even as an “up” January suggests the market is getting ready to fire on all cylinders for months to come.

Even more telling, some supporters of the January effect think the first five days are a good enough sign to get in for the rest of the calendar year.

Let’s stretch that out a bit, say to double the time, or 10 days. What happened to the S&P 500 in that stretch, from January 2 through January 12? Stocks went up, rising 3.4% — or 97 S&P points.

Repeat that 12 times and your portfolio would be raging, right? Of course, some months will be better than others, as in any year. But we know that the proclivity of stocks most years is to rise and rise some more, and there’s really no reason 2018 won’t be the same.

In fact, the typical late bull market surge of retail investors — which often drives the real blow-off moment for stocks — still hasn’t happened. So despite this bull market’s increasing age, it might still have legs for a surprising run higher before finally getting turned back.

So, how can you use the January effect to your advantage? By picking up bank stocks that have outpaced even that nice little bump for stocks overall.

To find those banks, I set up a screen that first eliminated all but  the highest-quality banks using our Weiss Rating Stock Screener. I then set the 10-day price return at 3.35% as a minimum. Finally, I selected a market capitalization range of $300 million to $2 billion, limiting my resulting list to smaller-cap selections.

Small-cap stocks are more volatile, of course. But that can work to your advantage when the volatility is to the upside — which is currently the case. The resulting screen looked like this:

Data Date: 1/19/2018

Leading the way is Heritage Commerce Corp. (HTBK, Rated “A”), with a recent 10-day return of 8.8%. This San Jose, California bank holding company does lending, investing and banking as Heritage Commerce Bank via 11 branches in the San Francisco Bay area. The bank sports a solid dividend yield of 2.4%, bumping up total returns whatever happens in 2018, and it reported a one-year gain of 21.7%.

Farmers National Banc Corp. (FMNB, Rated “A”) in Canfield, Ohio jumped 8.3% over a most recent 10-day period, and has a one-year return of 16.8%. The bank has 30 locations in Ohio and Pennsylvania, and offers a full line of banking and investment services.

Seacoast Banking Corporation of Florida (SBCF, Rated “A”) is a Florida East Coast bank based in Stuart with 46 branches and five commercial lending offices. Its shares rose by 7.1% during a recent 10-day period, following a one-year run higher of 27%.

Portfolio diversification and solid security selection is the key to growing your bank stock portfolio all year long. And with the January Effect pointing toward a strong 2018, targeting banks with strong Weiss Ratings like those I’ve highlighted here, could pay off nicely for you.

Think Safety,

Gavin Magor

Gavin has more than 30 years of international experience in credit-risk management, commercial lending and insurance, banking and stock analysis and holds an MBA. Gavin oversees the Weiss ratings process, developing the methodology for Weiss’ Sovereign Debt and Global Bank Ratings. Gavin has appeared on both radio and television, including ABC and NBC as an expert in insurance, bank and stock ratings and has been quoted by CNBC, The New York Times, Los Angeles Times, and Reuters as well as several regional newspapers and trade media.