Two January effect stocks

Remember the January Effect? A phenomenon where stocks, especially small caps, rally from the end of December, through the first week of trading in January, as investors are able to buy into names that had been sold in order to recognize tax losses. This has been a forgotten strategy for investors over the last few years, but my hunch is that we will see it return stronger than ever this year. Why? Because some of these stocks have gotten crushed due to the market volatility since the summer, and their big losses were exaggerated by tax loss selling. Here are two picks that are poised to gain from the January Effect:

Federal Home Loan Mortgage Corp. (NYSE: FRE) - while not a small-cap, this stock nonetheless should be in store for a spike. The government-sponsored enterprise creates liquidity in the residential mortgage market by guaranteeing, purchasing, securitizing and investing in such loans. FRE has lost more than have of its value recently, and certainly part of that was caused by sellers looking for a loss.

Ceragon Networks (NASDAQ: CRNT) - The WiMax company has been in a downturn ever since it had trouble doing a secondary offering, which ended up being priced just before the announcement that Sprint/Nextel (NYSE: S) was exiting this WiMax network. Investors should look at this with a bit of perspective, as Intel (NASDAQ: INTC) and Nokia (NYSE: NOK) are all still forging ahead with the technology. My buddy Zack Miller has a nice analysis of this. Look for Ceragon to have a strong bounce over the next few weeks.

Aaron Katsman is the lead Portfolio Manager and Managing Director of America Israel Investment Associates, LLC. and Senior Editor of IsraelNewsletter.com. Disclosure: Writer has no position in any stock mentioned as of 12/19/07.