How do you see "tax-loss selling" impacting the market over the coming weeks? Someone told me that the first 2 weeks in December the Mutual Funds dump a lot of their little companies and window dress for the last 2 weeks where they buy the GM's and other big companies to make their funds look good for their customers? They then sell a lot of the big companies and go into the little ones again in January? What about puts for the first 2 weeks in December and calls for the last 2 weeks? (November 19, 2001)

  There are several theories following stocks this time of the year. One maxim is to buy stocks in October and sell in May. Another is tax loss selling. Another is window dressing for year end reports. And then there is the January effect where small stocks tend to outperform the big caps. Last year there were a lot of factors working against the market, e.g., very contentious national election, a realization that the economy was really starting to tank, rapidly dropping corporate earnings. Tax selling took a lot of the blame because (1) no one wanted to say the election had anything to do with what was going on, (2) the economists would not give up on the rosy outlook for the future (remember some said there would need to be rate hikes in January), and (3) no one wanted to doubt the Fed. The selling had many faces and many underlying reasons behind it, but tax selling got the blame because most market followers were unwilling to admit the real problems underlying why institutions were dumping shares: they felt they were going to go even lower.

As for the January effect, on a whole smaller stocks do tend to do better early in the year, even starting in December. One can play these general trends, and we are aware of them when we look at investment opportunities. That is still the key: specific trades on specific stocks as opposed to general buying and shorting. The January effect is very general and subject to outside influences; last year it was the bear market, tanking earnings, elections. This year is the stimulus, recovery and the war. Thus we anticipate a better January effect than usual.


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