(MONEY Magazine) – As predictable as tighter waistbands after the holidays is increased chatter from market pundits about the January effect--the outsize profit that small-cap stocks tend to earn in the opening month of the year. The problem with the January effect is that it is most pronounced in microcap stocks, which are so expensive to trade that transaction costs and taxes wipe out most of any gain.

Professor Vijay Singal, however, has a novel take on the phenomenon. Singal, head of the department of finance at Virginia Tech and author of the recently published Beyond the Random Walk: A Guide to Stock Market Anomalies, notes that the January effect's real winners are actually the losers--those stocks that have fallen 70% or 80% over the previous year. (It's that drop that propels most of them into microcap territory.)

Owners of such stocks sell in December, claims Singal, so they can use the losses to offset taxes due on profits realized during the year. Come January, the now oversold stocks are primed to bounce back. Between 1988 and 2001, the 10% of stocks that did the worst over the previous year gained an average of 10% in January, compared with a typical gain of less than 2% for stocks that performed better over the previous 12 months.

No, you don't want to scoop up the dogs in December with the plan to sell come Jan. 31, because the problem of transaction costs still applies. But if you own some catastrophic losers, you could well recoup some of your losses by postponing a sale until the end of January. Yes, that means you'll put off booking that tax loss, but Singal's stats indicate that you'll still come out ahead. And entering the new year with healthier returns is the best kind of January effect. --MAGGIE TOPKIS