R U Ready 4 Dec/Jan Effect?
- Thread starter BlueHorseshoe
- Start date
We discussed briefly, on our radio show Saturday, the "effect" if you want to call it that. We simply call them "year enders" (no sophpmoric comments), and have been exploiting this play for decades.
The premise is simple, the timing is variable, the work is difficult, but the results are usually worth it.
In deference to the few traders of ours that haven't yet completed their entries, I will not go into too much detal, but since time is already nearly out for entry (is out for most), I will explain the basic premise.
Find stocks that have been beaten up pretty badly, and who are likely to be sold for tax losses....buy them, and hold until January when those who sold them want them back. The reason that the timing is "variable" is because, like most things in trading, many people "jump the gun." Heck we often have exits before Christmas (with 25% returns, why not?).
Since this is a highly capital intensive move, we save this for our more advanced classes and more well capitalized traders.
We dedicate a whole session in our boot camp to the methods used to find these stocks, and since it usually takes about 2 weeks of at least 2-3 hours per day, most traders don't have the time or patience to really benefit from this....but with monthly returns of 20-50% or more, it can be well worth it.
More in January, I'll let you know how ours turn out then.
Don
BTW...I haven't read the last few pages...if you were taling about the Dec/Jan effect of the overall market....the same logic applies, except that you must take into consideration the basis year, the current year, and adjust for upward/downward bias (if we were up vs. down a bunch, then the tax selling may not apply, but the capital gains benefits would hold.....another whole story for another thread.....
The premise is simple, the timing is variable, the work is difficult, but the results are usually worth it.
In deference to the few traders of ours that haven't yet completed their entries, I will not go into too much detal, but since time is already nearly out for entry (is out for most), I will explain the basic premise.
Find stocks that have been beaten up pretty badly, and who are likely to be sold for tax losses....buy them, and hold until January when those who sold them want them back. The reason that the timing is "variable" is because, like most things in trading, many people "jump the gun." Heck we often have exits before Christmas (with 25% returns, why not?).
Since this is a highly capital intensive move, we save this for our more advanced classes and more well capitalized traders.
We dedicate a whole session in our boot camp to the methods used to find these stocks, and since it usually takes about 2 weeks of at least 2-3 hours per day, most traders don't have the time or patience to really benefit from this....but with monthly returns of 20-50% or more, it can be well worth it.
More in January, I'll let you know how ours turn out then.
Don
BTW...I haven't read the last few pages...if you were taling about the Dec/Jan effect of the overall market....the same logic applies, except that you must take into consideration the basis year, the current year, and adjust for upward/downward bias (if we were up vs. down a bunch, then the tax selling may not apply, but the capital gains benefits would hold.....another whole story for another thread.....
For your reading pleasure, historical and statistical fact. Not opinions or emotions. YMMV.
http://www.safehaven.com/showarticle.cfm?id=1148
http://www.safehaven.com/showarticle.cfm?id=1148
Great website! I also enjoyed the article "The 22 Rules of Trading".
http://www.safehaven.com/showarticle.cfm?id=1147
I want to thank everyone for their contributions. I went on vacation (to a casino in Malaysia, of all places) for a few days and just now catching up.
Seems there are a couple of phenomena but the tax selling phenomena seems to predominate.
Here is an article that tends to mimic Mr. Bright's comments above:
http://www.marketwatch.com/news/yho...o&guid={52259AA3-416A-4547-9DDD-967AFEB88AA8}
Haven't entirely pulled a coherent strategy together, but will confess to plunging on LAB, of all counters, yesterday. Think I am going to play this stock by stock, and then step back and look for a pattern in the mess I ultimately make.
On LAB: God I hate having MMs working the NYSE and hope they eventually go bankrupt. That being said, LAB is trading at less than 2x cash on hand, transition to electronic trading should take years once it is even decided upon, and nobody but nobody has an interest in a bankrupt firm making markets for anybody. I don't foresee holding this beyond mid-January.
Another firm recently on my radar screen is FWHT - stellar financial statements and good momentum. Perhaps less a December/January play per se, but worth being long on. Also, I like the high short-interest and impressive (for a small cap) list of institutional shareholders.
I'll try to post something more comprehensive as it comes together.
Seems there are a couple of phenomena but the tax selling phenomena seems to predominate.
Here is an article that tends to mimic Mr. Bright's comments above:
http://www.marketwatch.com/news/yho...o&guid={52259AA3-416A-4547-9DDD-967AFEB88AA8}
Haven't entirely pulled a coherent strategy together, but will confess to plunging on LAB, of all counters, yesterday. Think I am going to play this stock by stock, and then step back and look for a pattern in the mess I ultimately make.
On LAB: God I hate having MMs working the NYSE and hope they eventually go bankrupt. That being said, LAB is trading at less than 2x cash on hand, transition to electronic trading should take years once it is even decided upon, and nobody but nobody has an interest in a bankrupt firm making markets for anybody. I don't foresee holding this beyond mid-January.
Another firm recently on my radar screen is FWHT - stellar financial statements and good momentum. Perhaps less a December/January play per se, but worth being long on. Also, I like the high short-interest and impressive (for a small cap) list of institutional shareholders.
I'll try to post something more comprehensive as it comes together.
Just to update ...
I simply liked the bullish action in the Dow and abandoned compiling a list of individual stocks. Put on a good long position in YM over the course of last week. Intend to put on full position by end of day Monday, Tuesday at the very latest. Plan now is to sell on Jan 1. If the market is very strong through Dec. 31 I may take off half the position a day or two sooner.
Finally came across a good summation of the Santa Claus Rally & January Effect. Happened to buy "Beyond the Random Walk" by Vijay Singal today and chapter 2 is dedicated to Dec/Jan effects. The forward:
"Small loser stocks are known to appreciate considerably in January, giving rise to the so-called January effect. The primary explanation for the January effect is tax-loss selling by investors in December to realize capital losses that are used to offset capital gains. When the selling pressure abates in January, the loser stocks appreciate. Unfortunately, it is not possible to arbitrage the January effect, though investors can gain by changing their trading patterns.
The December effect is similar in spirit to the January effect. Stocks that have done well in the January-November period are not sold by investors in December because selling those stocks will result in taxable gains. By waiting a few days, investors can postpone payment of capital gains taxes by almost one year. It is relatively easy to gain from the December effect, as popularly available indexes can be used for trading."
So ... plan is to hold/build long YM position through Jan 1 and then to pivot into small cap losers in January and resume some of my bread-and-butter trading.
On a final note, I won't be updating my progress with this strategy because I've found that talking about my positions publicly changes (slightly) my willingness to hold 'em or fold 'em.
Thanks all.
I simply liked the bullish action in the Dow and abandoned compiling a list of individual stocks. Put on a good long position in YM over the course of last week. Intend to put on full position by end of day Monday, Tuesday at the very latest. Plan now is to sell on Jan 1. If the market is very strong through Dec. 31 I may take off half the position a day or two sooner.
Finally came across a good summation of the Santa Claus Rally & January Effect. Happened to buy "Beyond the Random Walk" by Vijay Singal today and chapter 2 is dedicated to Dec/Jan effects. The forward:
"Small loser stocks are known to appreciate considerably in January, giving rise to the so-called January effect. The primary explanation for the January effect is tax-loss selling by investors in December to realize capital losses that are used to offset capital gains. When the selling pressure abates in January, the loser stocks appreciate. Unfortunately, it is not possible to arbitrage the January effect, though investors can gain by changing their trading patterns.
The December effect is similar in spirit to the January effect. Stocks that have done well in the January-November period are not sold by investors in December because selling those stocks will result in taxable gains. By waiting a few days, investors can postpone payment of capital gains taxes by almost one year. It is relatively easy to gain from the December effect, as popularly available indexes can be used for trading."
So ... plan is to hold/build long YM position through Jan 1 and then to pivot into small cap losers in January and resume some of my bread-and-butter trading.
On a final note, I won't be updating my progress with this strategy because I've found that talking about my positions publicly changes (slightly) my willingness to hold 'em or fold 'em.
Thanks all.
The Stock Trader's Almanac on Seasonal Effects:
http://www.forbes.com/video/?expire...ideo/fvn/guru/gurupick29.asf&_requestid=31942
http://www.forbes.com/video/?expire...ideo/fvn/guru/gurupick29.asf&_requestid=31942
I second that....
Michael B.
Michael B.
It is one of those self fulfilling prophesies, The only thing that changes is the candidates and the amount of candidates. How could anyone say that there will be no january effect this year when we had them in the Go-Go days. Just like people buy the dogs of the dow. This does not mean the markets in general will advance but select stocks that have been under alot of pressure due to tax losing selling. Not all mutual funds end there fiscal year in october. Not to mention, individual investors can cause pressure on beat up stocks. If you look at a few companies with great fundamentals that I have on my watch list that cant find a bid in this buyer friendly market. There will always be tax loss selling hence there will always be some january effect to a degree.