Financial Sell-Off: Blame Tax Loss Selling

Financials again underperformed today, despite Treasury Secretary Paulson's press conference highlighting his efforts to help homeowners whose ARMs are resetting at higher rates.

One likely cause of the continuing selloff in financials is tax loss selling. Keefe Bruyette Woods highlighted this in a note today to investors. Analyst Melissa Roberts said, "Given the continued underperformance of the Financials sector, we believe retail investors may parse down positions in financial stocks in an attempt to improve after-tax portfolio returns by harvesting tax losses to offset gains...We continue to believe tax loss selling by retail investors could be a liquidity event which should allow institutional investors to more easily build positions in these names."

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