This One Easy Trick Could Make You Much Richer This January
Sectors Most Likely to Rebound
My Favorite End-of-Year Investing Candidates
People ask us the “trick” to making money in the stock market all the time. Usually we tell them there isn’t one: the keys to success are a time-tested system, a plan, and the patience and discipline to follow it.
This time of year is the exception to that advice! There is actually an easy “trick” you can use to make money in December and January that proves surprisingly reliable year after year.
Tax Loss Selling
The U.S. tax code requires investors to pay capital gains taxes on their investment profits each calendar year. For obvious reasons, most investors don’t enjoy forking over part of their earnings to the IRS in April—and capital gains taxes can be as high as 43% on profits from investments sold after less than a year.
Many investors do whatever they can to avoid these taxes, including selling losing positions that they might otherwise hang on to. When you sell a stock for a loss, you can use that loss to offset profits realized by selling winners the same year.
This “tax-loss selling,” as it’s called, tends to further depress the prices of the year’s underperformers in early December. Investors want to book their losses before the end of the year, so they can offset their profits from the same year. The effect is most noticeable in stocks that are the furthest in the red year-to-date.
The chart below shows some of this year’s worst performing sectors—energy, basic materials and pharmaceuticals—all chock full of potential candidates for tax-loss selling this month.
The Santa Claus Rally
The selling tends to dry up around the middle of the month, as investors get their portfolios in order and begin their Christmas vacations. And then over the Christmas break and into early January, many of these stocks bounce back, as bargain hunters begin snatching them up at the attractive low prices—sometimes even the same investors who sold them a couple of weeks earlier.
(When hedge funds do this, it’s called “window dressing,” because it prevents shareholders from seeing big losers reported as portfolio holdings at year-end. Come January, fund managers feel free to own whatever they want again, and sometimes buy back the same stocks.)
This rebound is sometimes called the “Santa Claus Rally” and it’s a remarkably reliable seasonal pattern. According to the Stock Trader’s Almanac—the experts on seasonality, the market rises between Thanksgiving and New Year’s about 70% of the time.
Come January, many of these rebounders continue to rise—small stocks and the prior year’s underperformers tend to do particularly well. In fact, studies have found that the worst performing securities at the end of one year are some of the best-performing securities in the first quarter of the following year.
So Which Stocks Do I Buy?
As shown in the chart above, energy stocks have been some of the worst dogs in the market this year. That makes them good candidates for tax-loss selling. But the continued decline in oil prices—crude fell another 16% over the past month—means investors may not be ready to start piling back into many energy names even when the Santa Claus rally begins. I recommend that bargain hunters in the oil patch choose their stocks carefully, focusing on names with low debt and low production costs.
Pharmaceuticals may be better candidates for end-of-year bargain hunters. Commodity-related stocks could also see strong rebounds; Agrium (AGU) is one name I’m recommending in Cabot Dividend Investor that’s well positioned for a December-January rally.
But the richest bargain hunting ground, to me, looks like the retail and consumer discretionary sector, which took a hit this fall but is still one of the strongest sectors of the U.S. economy. For example, after a stellar rally in 2014, Target (TGT) is down 3% year-to-date, despite delivering good earnings growth all year. I wouldn’t be surprised to see the stock remain dormant until late December and then come back to life after investors unwrap their Christmas gifts.
You can get more great stocks which will be great additions to your portfolio by taking a risk-free trial subscription to Cabot Dividend Investor.
Of course, if you want to have a really happy New Year, do what I do and pick up a copy of Mike Cintolo’s Low-Priced Stocks report before December 14. Mike has been tracking these year-end patterns for decades, and he has a knack for finding the highest-potential setups going into the Santa Claus rally. You can get his 10 best year-end investment ideas by clicking here. They’re all priced under $12, so you can buy a few that pique your interest, hold on to them until mid-January (Mike sends a follow-up around then) and start the New Year with a nice chunk of change in your pocket!
Chloe Lutts Jensen
Chief Analyst of Cabot Dividend Investor