Is the “January Effect” in the Room with Us? VIEW IN BROWSER By Michael Salvatore, Editor, TradeSmith Daily In This Digest: - Nvidia shares fall after flashy keynote speech
- The “January Effect” is an investor hallucination
- Make sure to avoid December’s biggest seasonality winner
- Two seasonal bets with double-digit average gains
Nvidia just unveiled its next big bet on AI… For the past three years, Nvidia (NVDA) has been the poster child of Wall Street’s AI boom. Its semiconductors have been the golden picks and shovels that AI companies need to build faster and more robust AI models. That’s earned it a $4.5 trillion valuation, making it the world’s biggest company. So when Nvidia’s CEO, Jensen Huang, takes the stage, investors pay attention. Yesterday onstage at the annual Consumer Electronics Show in Las Vegas, Huang introduced Vera Rubin – Nvidia’s next-generation platform for AI data centers. 
Nvidia CEO Jensen Huang presenting the new Vera Rubin system | Source: Bloomberg The big promise of Vera Rubin is its ability to cut the cost of training large AI models like ChatGPT down to a tenth of what it costs now. And it’s able to do that because it’s not just another chip, but a fully integrated system of different components like memory and networking architecture. It’s designed for the huge datacenters being built out by OpenAI, Microsoft, Coreweave, Google, and countless other big tech companies right now. Why does this matter? Modern AI systems aren’t limited by raw computing power anymore.
They’re limited by how fast data can move – between memory, between chips, and across entire data centers. Vera Rubin is Nvidia’s answer to that bottleneck. In effect, the company is betting that the future of AI won’t run on individual computers… but on “AI factories.” The bet is that these massive, always-on systems will train and run models continuously at industrial scale. Essentially, Nvidia isn’t competing on chips anymore because it’s so dominant it hardly has to try. Instead, it’s positioning itself as the core infrastructure provider for the AI age. | Recommended Link | | | | The legendary stockpicker who built one of Wall Street’s most popular buying indicators just announced the #1 stock to buy for 2026. His last recommendations shot up 100% and 160%. Now for a limited time, he’s sharing this new recommendation live on-camera, completely free of charge. It’s not NVDA, AMZN, TSLA, or any stock you’d likely recognize. Click here for the name and ticker. |  | | Will this be enough to lift Nvidia’s share price? As we’ve been covering in these pages, Nvidia’s share price is down more than 9% since its all-time high set last October. And its share price fell as low at 2.9% yesterday as Huang strutted the stage in a crocodile-patterned black leather jacket. Many investors would’ve looked at Huang’s flashy presentation and assume the stock is a screaming buy. But assumptions are dangerous in the financial world. Here at TradeSmith, we skip the assumptions and look instead at the data. And what our data shows is a mixed message on NVDA. Take a look at this chart of Nvidia along with its Short-Term Health signal – what you may know as a Flash Buy from our recent debut presentation: 
Back on Dec. 8, NVDA entered the Short-Term Health Yellow Zone – indicating the stock is a hold at current levels. Think of the Yellow Zone like a yellow traffic light. You can respond to it by speeding up (buying more)… or slowing down (selling). In that way, it acts as a bridge between the Green Zone – where we consider the stock a Buy – and the Red Zone, where it’s a sell. We can see that back in December 2023, NVDA entered the yellow zone right at the end of the year before entering a six-month downtrend. And on Feb. 7, the stock then entered the Red Zone before falling as much as 27%. We’re not calling NVDA a sell just yet. But we’d suggest keeping a close eye on its Short-Term Health status. Another shift into the Red could spell a rout in NVDA shares. And with the company making up 7.4% of the S&P 500, that’s sure to drag the broader markets down with it. Here’s another dangerous assumption to avoid… Back in 1942, investment banker Sidney B. Wachtel noted that, since 1925, small-cap stocks had outperformed the large-cap indexes in the month of January. In the decades since, this observation has morphed into a broad assumption that January produces the best returns all year long. Some theories behind it include traders selling losing positions at the end of the year for tax reasons, only to rebuy them at the start of the next year… Or year-end bonuses burning a hole in their pockets and making their way into stocks. In any case, the January effect was real… for a while anyway. TradeSmith’s newest Seasonality Statistics show us that, between 1950 and 2000, the best month to own the S&P 500 was indeed January. Over those decades, the index returned an average of 2.4%: 
But here in the much more relevant 21st century, January is actually just the seventh-best performing month of the year: 
Over the past 25 years, November has been the best month to own stocks, with an average gain of nearly 2.5%. Meanwhile, June is the worst month, with an average loss of 0.15%. It’s a reminder to regularly test those old market adages that most take for granted. Under scrutiny, they might look more like an investor hallucination. Markets evolve and change over time. Just because January used to have a so-called “effect” doesn’t mean it still does. And blindly following old ideas – especially those unsupported by data – is a good way to lose money. To put icing on the cake, just look at how small-cap stocks have performed in January this century. That was the whole impetus of the theory to begin with. But since 2000, January has been the worst month for small-caps all year: 
But just because January has been a disappointment this century doesn’t mean we can’t find a great trade. As a matter of fact, there are two very important trades to make this month… Let’s take a deeper dive on our Seasonality data… Seasonality is just one of ways we help you stack the odds in your favor using data. If certain stocks have a historical tendency to rise or fall at a certain time during the year, you can use that to your advantage. That’s why, at the start of every month, we look at the biggest sector winners and losers to help you decide where to put your hard-earned capital. Back on Dec. 1, we showed you that Materials Select Sector SPDR Fund (XLB) had risen 72% of the time between 2000 and 2024 in December. And on the times when it rose, it returned on average of 3.8%. This time, XLB rose 1.7% in December – for another bullish seasonal window. And in doing my typical monthly sector study, I noticed something you may want to act on ASAP. Below are all the major S&P 500 sector ETFs sorted by January win rate. As you can see, XLB is also one of the worst seasonal performers in January. It’s been up less than half of the time. Plus, its average return has been a loss of 1%: 
If you’re still holding positions in the materials sector this month – think metals and mining, chemicals, and construction materials – the odds are stacked against you. Now, let’s look instead at where the odds are stacked in your favor: Healthcare and Communications. So far this century, the Health Care Select Sector SPDR Fund (XLV) has been up 61.5% of the time in January. And in those bullish seasonal windows, it’s gone up by an average of 3.8%. The Communication Services Select Sector SPDR Fund (XLC) has been trading for just seven years, making it the youngest sector ETF available. But it’s been up in January for all but one year (2021) for an average gain of 8.9% in those bullish windows. That’s a short track record but a strong one. And it’s worth noting that the XLC ETF is loaded with big tech companies that have broadly outperformed the market over this same stretch of time. So let’s dive more deeply into this sector. I ran the same analysis on the top 10 companies in the XLC ETF. (You’ll see 11 holdings, since Google parent Alphabet weighs heavily in the fund with both of its different share classes and tickers: GOOG and GOOGL.) Here are the results: 
It’s hard not to want to run out and buy Meta Platforms (META) and Netflix (NFLX) with numbers like this. Both have been up around 75% of the time in the month of January since they’ve been public. And when they go up, they win big. Netflix has rallied an average of more than 25% over the last 23 years in January. Meta is no slouch either, with an average winning trade of 16.3%. Just mind the average losses, too. When these stocks fall, they tend to fall by double digits. So the January effect is still in… effect. Just not for everything. Communications stocks have a short but well-worn history of running higher this month. They’re worth a closer look as you plan out the next few weeks. To building wealth beyond measure, 
Michael Salvatore
Editor, TradeSmith Daily Disclosure: Michael Salvatore holds shares of Alphabet (GOOGL) and Meta Platforms (META) at the time of this writing. | 
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