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The end of year tends to be a seasonally strong period for stocks. Some analysts believe the January effect has moved into the end of year with stocks doing better in the final weeks of the year as traders try to arbitrage the January effect.

Arbitrage is a trading strategy where investors buy an undervalued asset they believe has a high probability of rising. For example, it could be the stock of a company that is being bought by another company. The deal might be for $100 a share but the stock trades at $99, giving the arbitrage trader a riskless profit of $1 a share.

Unfortunately, opportunities such as an underpriced buyout candidate are rare. This leads sophisticated traders to look for other opportunities. Analysts believe some try to arbitrage the January effect.

The January effect defines the tendency of stocks to rise in the first month of the year. Researchers have found that this has been especially true for small cap stocks. Traders seeking to benefit from the January effect would need to buy their positions before January.

Since the effect has been most pronounced in small stocks, larger traders may need to start buying earlier than small traders in order to accumulate their position before the end of the year. As more and more traders enter the market, it would seem the buy period becomes earlier and earlier each year.

Benefitting From End of Year Buying

To maximize the potential benefits of end of year buying, traders could consider low priced technology stocks. These stocks are likely to be among the most volatile in the stock market and the most volatile stocks could be expected to be among the biggest winners.

In an effort to find potential buy candidates, we screened for stocks that could be in this group. Specifically, we searched for stocks with low prices because low priced stocks have the potential to make the largest percentage move in a short period of time. We limited our search to stocks that were trading at less than $7 a share.

We also limited our search to technology stocks since that is a volatile sector. Because we are limiting our search to volatile, and therefore risky stocks, we are adding filters in an effort to limit risks.

The first filter is fundamental. We limited our search to stocks that were profitable in the past twelve months and are expected to report profits in the next year. Our second filter was technical. We limited our selections to those stocks that are trading above their 200 day moving average. This means the stock is in a long term up trend.

One way to find stocks meeting these requirements is with the free stock screening tool available at FinViz.com. At this site, you could screen for a variety of fundamental factors, high levels of institutional ownership and bullish institutional transactions. An example is shown below.

This screen used the criteria listed above to identify seven technology stocks under $7.

Seven companies passed this screen and could be a starting point for research. The companies were:

AU Optronics Corp. (NYSE: AUO) researches, develops, produces, and sells thin film transistor liquid crystal displays and other flat panel displays. The Display segment designs, develops, manufactures, assembles, and markets flat panel displays for use in televisions, TV sets, and other related products; desktop monitors; mobile PCs, such as notebooks and tablets; mobile phones; and commercial and other applications, including displays for automobiles, industrial PCs, automated teller machines, point of sale terminals, pachinko machines, and others.

The Solar segment manufactures and sells solar materials, including ingots, solar wafers, and solar modules, as well as provides technical engineering and maintenance services for solar system projects. This segment sells its ingot and solar wafer products primarily to solar cell manufacturers; and solar modules to installers, solar system integrators, property developers, and other value-added resellers.

The stock’s chart shows an extended basing pattern within an up trend that has lasted more than a year.

Phoenix New Media Limited (NYSE: FENG) provides approximately 40 Interest-based verticals through its Website, ifeng.com. These include news, finance, automobiles, entertainment, fashion, military affairs, live broadcasting, we-media, sports, history, video, and PC digital reading; offers interactive services, including comments posting and user surveys; and operates third-party developed Web-based games on its game platform, play.ifeng.com.

The chart below indicates the stock appears to be breaking out of a consolidation pattern.

Planet Payment, Inc. (Nasdaq: PLPM) provides international payment and transaction processing, and multi-currency processing services in the Asia Pacific region, the Americas, the Middle East, Africa, and Europe.

The company offers payment processing services that enable the authorization and settlement of payment transactions by providing the connections between the merchant, its bank, and the card association; and online access to advanced reconciliation and reporting services, as well as localized language support to its customers.

Its flagship offerings include multi-currency processing services, such as Pay in Your Currency, a point-of-sale dynamic currency conversion (DCC) service, Multi-Currency Pricing primarily for card-not-present merchants and DCC at ATMs that enable merchants to offer customized pricing in multiple currencies.

Pixelworks, Inc. (Nasdaq: PXLW) designs, develops, and markets video processing semiconductors, intellectual property cores, software, and custom ASIC solutions for digital video applications.

Its products enable customers to deliver the energy efficient video quality on their devices. The company provides video display processor products, including image processor integrated circuits, such as embedded microprocessors, digital signal processing technology, and software that control the operations and signal processing within high-end display systems; and video co-processor integrated circuits that work with an image processor to post-process video signals to enhance the performance or feature set of the overall video solution.

Quarterhill Inc. (Nasdaq: QTRH) an intellectual property licensing company, develops, acquires, and licenses various patented technologies. The company licenses its patents to companies that sell products utilizing a range of technologies, including Wi-Fi, WiMAX, LTE, CDMA, DSL, DOCSIS, Bluetooth, V-Chip, and 3D television, as well as automotive headlight assemblies, semiconductor manufacturing and packaging, medical stent, video streaming, CMOS image sensors, building automation, computer gaming, smart meter monitoring, and LED lighting.

Sunrun Inc.  (Nasdaq: RUN) engages in the design, development, installation, sale, ownership, and maintenance of residential solar energy systems in the United States. It also sells solar leads. The company markets and sells its products through direct channels, partner channels, mass media, digital media, canvassing, referral, retail, and field marketing.

United Microelectronics Corporation (NYSE: UMC) provides semiconductor wafer foundry solutions. It provides circuit design, mask tooling, wafer fabrication, and assembly and testing services.

The company also engages in the research, development, and manufacture of products in the solar energy and LED industries. It primarily serves fabless design companies and integrated device manufacturers.

Any of these stocks could be a potential winner and all worth further research. If you are uncomfortable doing your own research, there is a TradingTips.com trading service, Triple-Digit Returns, which uses a very specific system for choosing the right stocks to trade.

Triple-Digit Returns looks for companies that are misunderstood and potentially undervalued, lost darlings, mergers or spinoffs that could benefit share holders, or companies that show signs of strong interest by insiders who know the company best and see value.

This service provides a recommendation once a week. It could be used for trading or learning how to analyze stocks since each recommendation includes a detailed explanation of the company. To learn more, you can click here to see more.