Why 2023 Underperformers Could Pop in Early 2024

Short-covering rallies could be coming in January

Senior Quantitative Analyst
Dec 28, 2023 at 8:00 AM
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If you are looking for short-term trade ideas early in the new year, read on. Shrewd investors can delay paying taxes on profits by a year if they wait until January to sell their winners. Similarly, short sellers who made money on poorly performing stocks can wait until 2024 before covering their shorts.

If this phenomenon is prominent enough, then we should be able to identify some short-covering rallies for the beginning of the year. Below, I am looking if early year short-covering rallies come up. If so, we might be able to find profitable opportunities.

Was 2023 Exceptional for This Indicator?

For this analysis, I looked at all stocks with at least 2,500 open interest and 5% of their floats sold short. This gives us liquid stocks with a fair amount of short interest. Then, I grouped them into how they performed in 2022. If our theory is correct, we should see the poor yearly performers do well early in the next year, as short sellers hold off on covering.

The S&P 500 Index (SPX) fell about 20% in 2022, so there were many stocks down significantly. Based on the data below, those were the stocks to focus on early in 2023.

In fact, out of the stocks that had at least 5% of their float sold short, the ones down at least 10% on the year performed best in the first five trading days of 2023. Those stocks gained over 4% for the week, with 75% of them positive and an impressive 70% beating the SPX, which was up 1.4% in that first week.

The stocks down moderately (less than 10%) gained about 3% on average, with 62% beating the index. The stocks that were positive in 2022 performed terribly over the first week of 2023. They averaged a loss, with only 43% positive, and just 35% beating the SPX. This indicator had you in the right stocks early on in 2023.

IOTW 1227 1

Before we get too excited, I looked at similar data in the five years before last year (first week of 2018 through 2022). The average first week return for those poor performers is still the best grouping, but it’s not that different from the other groups.

Specifically, 59% of those poor performers beat the SPX in the first week of the year, but that’s not extremely different from the 57% of the stocks that were down moderately, and 54% of positive stocks. While this was a great indicator for the fist week of 2023, it didn't show much outperformance in the five years before.

IOTW 1227 2

Potential Short-Covering Rallies for Early 2024 

While the data above offers some insights, it may not be entirely conclusive. Nevertheless, below are 25 stocks that were down at least 10% in 2023, and had at least 5% of their floats sold short. These stocks are beaten down with significant short interest.

This could pave the way for a short-covering rally early in 2024, as traders who are short with a healthy profit might look to cover soon after the New Year. It’s a good stalking list for short-term trades, and it could also be a confirmation indicator for those considering purchasing a technically weak stock.

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