Tax Loss Selling Plays 2012

January is a frigging nutty month for trading beaten up small cap, penny, china ding dog stocks.  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.

Look at some of these ipo stocks like $p $taom $renn $dang $yoku  These stocks were all 20-30 dollars during the ipo. Yoku ran up to 60.  Everyone who was a longterm investor or holder got murdered.  This is the time of the year were they finally give up and just sell for tax purposes.

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 $motr $ivan $leds $dcth $my a whole host of them are already starting to pop. They got the secret sauce that I listed above.  MOTR was 25 bucks this year and was being touted as a high growth IBD type of stock.  Everyone had to have a piece of that and they all got burned as the stock went into a death drop 

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

Some of my personal favorites are

FFN, CSKI, CNTF, MCOX, SATC, FBN, SCEI QPSA, SQNS, PNCL SATC, KUTV , IPSU, ADY, DQ , CNAM, CIS

NOW this doesnt mean you just go and buy all of them. I tend to wait for signs that the move is coming a setup or bottoming signal. When i get thats when I hit the stock for the buy.

This is very powerful when you time it. Leds popped 20% in 1 day and we caught the exact bottom off by 4 pennies. Motr was the same way we picked the exact inflection point where it started its big squeeze.

A few of the things I look for besides technical setup is some idea that the stock was beaten way to far.  A stock like $my which we nailed for 25% gain it had 100million market cap and 1billion in revenues!!!!

it had 220m in cash and very little debt! so essentially if the stock is not a fake company its dirt cheap.  

from yahoo finance

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check out $cntf its selling for 1/2 its cash and has 300m in revs.  

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