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Review Of The January Closed End Fund Strategy at Trader’s Narrative

Last month I outlined a strategy using closed end funds to take advantage of the January effect in the stock market. The opportunity came and went, so here’s a brief review with a few specific examples.

In order to give you the right idea, lets start with a good example to show the pattern we’re looking for. The BlackRock Minicipal Bond Fund (BBK) is a great example of the setup:

blackrock municipal bond fund bbk 2009 january effect

Notice how it dropped right into the technical support previously found in mid October? That, along with the volume spikes in early December, make this a great example. As prices lifted off into the new year, it was attracted to the swing high which acted as resistance - making it a natural place to scale out (red arrows).

Here’s another example with an equity CEF, the RMR Dividend Recapture Fund (RCR):

RMR Dividend Capture Fund January effect

I’ve highlighted the low volume because can be problematic if you step in with size and don’t use limit orders. Otherwise you’d do fine and pocket a +60% return. Even if we assume that you were able to squeeze out half of that, considering slippage and trading costs, etc. you are still looking at an astronomical annual rate of return.

Finally, I also wanted to show a less than perfect example to make sure that you don’t mistake this strategy as a sure thing:

morgan stanley frontier emerging markets fund FFD January effect

I stayed away from this one because it isn’t a municipal bond fund but if you played it, it was difficult to come out unscathed. On the plus side, the loss was very small. But it serves as a reminder that even with a high probability setup like this one, you can’t ignore risk completely.

If you want to see even more example, take a look at My Year-End Strategy.

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