Santa is leaving coal for regional bank stocks this year

‘Tis the season for tax-loss selling. When good investors go to sleep with visions of taking losses to offset profits dancing in their heads.

Investors sell losing stocks in November and December in order to generate tax deductions they can use to offset profits earned during the year. And historically that end of the year selling helps power what’s known as the January effect as investors with cash from their December disposals step in to buy bargains created by that end of the year selling.

I’d imagine that both the tax-loss-selling and the January bargain hunting are going to be the same but very different this year. It’s not often that investors go into December looking back at both a 64% gain in the Standard & Poor’s 500 (from the March 9, 2009 bottom) and a 53% loss in the 14-plus months (from January 1, 2008 to that March 9 2009 bottom).

In other words investors have plenty of profits to offset—from 2009—and lots and lots of candidates to sell from 2008-2009.

My guess, and it’s really no more or less than an educated read on investor psychology, is that the selling will be especially heavy in those stocks that have under-performed during the rally. No one really wants to sell a great recent performer at a loss. The impulse, research into investor behavior shows, is to hold it until the position breaks even.

But wait, we’ve had a huge rally. Can’t be many stocks down for the year, right? Read more