January has an unusual amount of trading indicators that are supposed to predict the rest of the year. There's the Santa Claus rally (last 5 trading days of the old year, first 2 of the new year, good for an average advance of about 1.4% for the S & P 500), the first 5 days of January barometer (when stocks close the first five days higher, the S & P 500 has been positive more than 80% of the time at year end with an average gain of 13%, according to the Stock Trader's Almanac), and the January barometer (as goes January, so goes the year). There is another short-term seasonal indicator followed on Wall Street: the tax-loss-selling bounce. This one is based on a different principle than the others: that the most beaten-up stocks in the prior year have a good chance to do better in the first part of the new year. Most market observers believe this happens because stocks with large losses in the January-November period will typically see tax loss selling in December. Those that are among the most heavily sold often see a bounce in January. Piper Sandler recently researched all S & P 500 stocks over the last 10-years that had year-to-date losses of at least 10% by the end of November. These are likely tax-loss harvesting candidates. They found that the average return for the tax loss harvesting candidates was 4.0% in the month of January, "substantially higher than the average SPX [S & P 500] January return of 1.5% since 2011," according to Craig Johnson, Piper's technical market strategist. "In addition, an average of 63% of tax loss harvesting stocks posted positive January returns," he said in a note to clients. This tax-loss bounce may have special resonance this January because several S & P 500 names had a brutal 2021. Based on the losses from January to November, Johnson's top picks for tax-loss harvesting candidates (and a bounce in January) are: Top tax loss harvesting candidates (12/31/20-11/30/21 losses) Global Payments (GPN) down 45% Penn National Gamin (PENN) down 41% Las Vegas Sand (LVS) down 40% Marketaxess Holdings (MKTX) down 38% Citrix Systems (CTXS) down 38% Activision Blizzard (ATVI) down 27% Virtus Investment Partners (VRTS) down 34% Lamb Weston Holdings (LW) down 34% Wynn Resorts (WYNN) down 28% Teleflex (TFX) down 28% Why do stocks that are strong tax loss candidates in December often produce outsized gains in January? "It's a combination of a mean reversion, investors returning to their favorite stocks post-harvesting a tax loss, and investors looking for value," Johnson told me. Selling a stock because you've had losses and then buying it back may seem odd, but Howard Silverblatt, senior index analyst at Standard and Poor's S & P Dow Jones Indices, says it makes sense. "There has been heavier selling than usual in these names because of tax loss harvesting," he told me. "Some investors will still want to buy the shares back because they believe in the story behind the stock."
Trader at the NYSE, Jan. 3, 2022.
January has an unusual amount of trading indicators that are supposed to predict the rest of the year.