There are two definite periods in the calendar year for traders to be aware of for the potential for overdone tax selling that upon completion may result in what is known as the tradeable tax bounce. These are periods for traders to be on the alert for bargains both on a short-term and potentially long-term basis. The first is the obvious end-of-year tax loss selling that goes into the end of December and the last trading day of the year. The second is the less well-known October 31st (or last trading day) which is the fiscal year for many mutual funds. The reason for the difference is that mutual funds need to prepare their financial statements for clients earlier and get them out to holders in a timely fashion without delay at the beginning of the New Year.
Given that we have just ended the month of October, it would be appropriate for the bargain hunter to run screens for the stocks that have deep liquidity, down big on the year, and are now moving off the lows of October.
Not only do individual stocks show this tendency, but groups and sectors as well. For example, just this past year in 2020 there were two distinct bouts of selling in the energy sector. The first on the pandemic capitulation that ended in March of that year, the second bout of selling was into the end of October. In the latter instance, the psychological panic-based selling that dominated March was not the driving factor. Although the election of November 2020 lay just ahead, it was the mutual fund end of the fiscal year-driven trading that caused the secondary low in prices. As soon as October passed prices lifted and continued up into the middle of December. The rally has continued into 2021.
So as astute traders we prepare a list of the most beat-up stocks and sectors to look through and value going into the end of these tax selling periods. We review valuations, street research, and recommendations (with an eye toward the higher-rated analysts) and most importantly we look at the charts. We also want to research some companies that may not have any analyst coverage.
For those with a speculative bent last year in the energy sector a few gems rose from the carnage within the natural gas sector. One would have had to have done a deep dive analysis on Antero Resources (AR) which traded as low as 64 cents in the March 2020 panic to have been an aggressive buyer, but one could have been a more confident buyer at 3.6 dollars at the end of October 2020. A year later the shares are trading with a 20-dollar handle. Not a bad return for a years’ time.
Just remember one should line up candidates ahead of the end of tax selling. Not all stocks will bottom in the last week, some will bottom up to a month or so ahead of that date. Look at the volumes on the chart to inform on when the selling has abated, then use proper entry criteria and rules when entering the trade. And always limit risk by placing stop-loss orders on the positions just in case the trade goes wrong. Trade well and stay safe.
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