Tax Loss Selling 1/3/2011 | Bulls on Wall Street

Tax Loss Selling 1/3/2011

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January is a frigging nutty month for trading beaten up small cap, penny, china ding dog stocks. (except for last year when the market was in freefall). What you will see is with the aftermath of this recession  a lot of big caps, smallcaps become microcaps! There can be great opportunity in these names as January starts. See many hedge funds, mutual funds, index funds don’t trade or cant hold smallcap stocks. But they do hold midcap and large stocks. What you have seen this year is many funds liquidated huge amounts of holdings either from deleveraging, margin selling, or just the liquidation of the fund itself essentially driving down many stocks below the 5 dollar threshold. Once it goes below that level many traders will also start to dump the stock as numerous brokerages wont let you hold these type of stocks on margin. Then months later when the Russell or any other index ore even an etf does its rebalancing it drops the stock out of its collection which then starts more forced selling. Next a mutual fund that is supposed to mirror said index will also have to sell….which means more forced selling. It’s a never ending cycle of selling. This type of forced selling can make a stock excessively oversold. Just when these type of stocks rebound slightly comes tax loss selling. As this was a great year for many investors many will unload their dogs to offset their ridiculous gains for the year. People will sell their biggest percentage losers to offset their capital gains this year.

 

Short sellers themselves this time of year will prey upon these stocks as they know that many longs have to unload them. If they can apply pressure on many of these weak stocks the volatility of the drop can be tremendous

 

These stocks can pop for a few different reasons

 

Shortsqueeze: You can get short interests data from shortsqueeze.com it will give u the interest and the days it takes to cover. This is all you need to see how much gas is in the burner. As they have pushed down the stocks for the last quarter January is a perfect time for them to cover their positions since the tax loss selling is over. A big short position can really magnify the gains and make a small cap stock go Parabolic (your getting double the buying pressure). The second force involved in this is the guys like us. The momo traders. Once somebody like me sees the squeeze he goes in and starts buying blocks, other traders see this too and get in for the fun. Now with twitter you get a viral action since people relay the information to each other in real time. The squeezes are much harder and stronger due to the advent of social networking. This squeeze could potentially go on for a week.

 

Also all the tax selling has subsided. No overhang or dark cloud over the stock. Overtime you will see the stocks drift back towards their natural range and valuation. As over time the fundamentals do play out and stocks will slowly and naturally drift to that level of equilibrium. You will also get the buying pressure from the guys who were dumping for tax reasons but now they want their stock back to get back their money ( most people are frigging banana blowers and cant just let a stock go and take a loss. 90% of traders) So they start buying.

 

Now you got a booooooooom baaaaaaaaalin scenario. The banana biters who want their stock back, the short sellers covering, the momo traders jumping in for the epic squeeze, the twitter leaches who miss the first 10% of the move but see so00000 many posts on it that they chase the squeeze. And bam there you go a big punch in the nuts to anybody who is still short.

 

Its already happening look at some of the stocks this week $ands $rpc  $ciic $hnsn $djsp $nmti  $banr a whole host of them are already starting to pop. They got the secret sauce that I listed above.

 

I have below a list of small caps that could. It goes from just the worst peformers in the market.

 
the few that I really like our FBC,  txic,  casb, ibcp, eee, coin, mela and a host of others. important part is to see if they are catching a bid first then we go in.
 
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http://finviz.com/screener.ashx?v=141&f=ta_perf_ytddown&o=perfytd&r=21

 

 
here is a list of them. customize it with your own parameters.  If you dont like low volume stocks add a volume filter.  If you dont like stocks with very small market caps add a market cap filter.  It all depends on your style and what you are comfortable with.

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