Tax-loss Selling

We think it is important to note that the Nasdaq Composite versus NYSE relative strength broke below the early November lows with last week's trading. This has usually been accompanied by weakness in the market as a whole.

Having said that, the week between Christmas and the New Year has usually been a favorable period for stocks - - particularly those stocks that have had difficult years and have been the brunt of tax loss selling by individuals (mutual funds generally sell losers in advance of the end of fiscal years which typically end in October). There are many years when it make sense to buy a basket of stocks during the several days before Christmas that the small investors are throwing away in the small/mid-capitalization segment.

We like to apply some fundamental analysis to these names and come up with a list of companies where various catalysts may occur to augment the returns from a simple bounce off the cessation of tax-loss selling. Stocks are only purchased where a 50% move over the following 3-4 months seems possible based on this combination of fundamentals and bounce capability. Of course, not every name will rise 50%, but a sufficiently large sample will, that in many years it is possible to average 20-25%. Since this has been a relatively solid year for stocks, the strategy of buying the dogs for a bounce doesn't have the same attraction as in other years. Still, this has always been the safest time of year to step up and catch falling knives if there are any that catch your interest.