At the end of the year much of the selling in the market is to lock in loses made by bad bets on stocks which went the wrong way. The theory goes that, as that selling stops after the first of the year, many of the shares which have been under pressure will come back.
According to Reuters "home builders, mortgage companies and banks were among the biggest losers in 2007 as the subprime crisis dried up lending, falling home prices and rising foreclosures hit home sales, and spoiled mortgage-related holdings forced multibillion dollar write-downs across Wall Street." Investors might be tempted to step into some of those stocks believing that they will move up in January, at least temporarily.
It is dangerous game. Stocks which are down due to bad news have an unfortunate habit of putting out more bad news. Investors hoping for a quick hit may find that there is no dead cat bounce at all. One announcement that things are getting worse in the credit or housing markets could send a number of stocks in those sectors to new lows.
Investing based on a tax selling rebound is like catching a falling knife.
Douglas A. McIntyre
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