trading between now and yearend

Practically speaking, 2012 is already in the books for investment professionals around the world.  Many are already on vacation.  Many global stock markets will be closed for most of the handful of business days between now and December 31st–Wall Street being a notable exception.  On days that markets will be open, trading volume will doubtless be very light.

Is there anything useful we can do as individual investors during this deadest of all trading weeks?     …other than celebrating the holidays and resting up for the challenges of 2013, that is.

Yes, there is.

1.  If you haven’t done so already, check the year-to-date tax position in your brokerage account.  You may want to consider either selling losers to minimize taxable gains or winners to lessen realized losses.

I believe very strongly that transactions driven solely by taxes are invariably a bad thing.  But I also think that tax considerations can be a useful way of overcoming one’s psychological aversion to admitting a mistake (every rookie professional’s biggest stumbling block) and thereby be an excuse for exiting a bad investment.  Yes, it would be better to man up and just sell the loser, without rationalization.  But the most important thing is getting the weak stock gone.

2.  the “window dressing” phenomenon.  I guess there really are professional portfolio managers–most of them soon to hit the unemployment line–who buy trendy stocks to “dress up” their portfolios so they’ll be cosmetically more attractive right before meeting with their customers.  And there may be financially illiterate customers who are fooled by this.  But that’s not really what I’m talking about.

There’s also a type of illegal stock manipulation of small-cap stocks on the next-to-last or last trading day of the year that is euphemistically called window dressing.   The stock “magically” rises (or falls, if a short-seller is at work) ten or fifteen percent, often in the last half hour of trading–in a way that helps a manager, or group of managers, achieve a higher performance-based bonus.  Nowadays, this most often happens in smaller markets in the EU or in the Pacific.  But it also happens in the US on occasion.

In my experience, this is always a good chance to sell.  The stock in question invariably crashes back to earth the first day of the new year.

3.  the fiscal cliff.  As I’m writing this, the S&P 500 futures are down about 1.5% on worries that Washington won’t reach an agreement to soften the economic damage from already legislated tax increases and government spending cuts slated to go into effect on January 1st.

It’s possible that politicians are even hoping for a 5%-10% stock market decline to give them the political “cover” they feel they need in order to justify compromise to the ir constituents.

In my view, 1.5% isn’t enough to act on, but a larger decline would doubtless an excellent opportunity to buy a stock you want to own, but think is too expensive–or to add to a position you have strong conviction in but think is too small.

Leave a Reply

%d bloggers like this: