All the very best of the holiday season to everyone, and a healthy, happy and prosperous new year too ! I don't know what everyone celebrates, me I just celebrate Festivus ! (Frank Costanza's Festival for the rest of us -g-)
This is from the Toronto star today :
Dec. 21, 2003. 08:51 AM
Psst! Think energy - and don't pass it on
BILL CARRIGAN
"Say kids! What time is it?"
Buffalo Bob Smith from The Howdy Doody Show circa 1951
Well kids, it's time for tax-loss selling, earnings warnings, quarterly window dressing and seasonal effects such as the Santa Claus Rally and the January Barometer.
Tax-loss selling is a year-end transaction for tax purposes. The theory is that investors with losing investments may sell before year-end to crystallize the loss in order to offset this year's profitable year-end trades. The profitable trades this year would be in strong sectors such as technology, financial services, materials and base metals.
In other words, some investors will sell winners and losers and put downward pressure on the markets through month end. Smart investors will of course ignore the temporary actions of bad investors who sell for tax reasons. Good investors will sell losing stocks as soon as the investment goes wrong. Good investors will hold winning investments as long as the up-trend remains intact.
Never let a tax decision interfere with an investment decision.
The earnings warning season for the fourth quarter has started and guess what? Bull markets climb a wall of worry. A rising tide lifts all boats.
Smart investors should also ignore year-end window dressing by portfolio managers who may add some recent winners to their holdings. They reason that nobody gets fired for adding a few more shares of Imperial Oil Ltd. to the portfolio.
Soon you will be hit with the Santa Claus rally stories. The rally usually occurs in the last four trading days of the year and spills into the first few days of January. File that one in the who-cares and who-needs-to-know category.
How about the January Effect? Soon you will read all about it in the business dailies. As January goes, so goes the year. Properly known as the January Barometer, pundits claim that a positive January may forecast a positive year. It has not worked lately with January, 2000, being a "down" month, January, 2001, being an "up" month, and the Januarys of 2002-03 being "down" months.
The effect of seasonal trading patterns is worth noting. Investors who buy into October lows and hold through November, December and January are almost assured of a positive return. Keep in mind, the other seasonal rule of "sell in May and go away" rule did not work in 2003.
The problem with these seasonal patterns is that the financial press has publicized them to death, and when we all know a rule, the rule lets us down. Obscure rules work better.
I have always used this space to encourage investors to observe and use the normal sector rotation at work in the markets. The first step is to know the 10 sectors: financials, information technology, health care, consumer staples, consumer discretionary, industrials, energy, telecommunications, materials and utilities.
The second step is to overweight in the sectors that are in youthful up-trends and reduce aging up-trends and avoid down-trends.
I will now let you in on an obscure rule that supports my sector methodology.
A study by Ned Davis Research on the third year of the U.S. Presidential cycle reveals that investors who were over-weighted in information technology and health care did better than investors who were over-weighted in consumer staples and utilities.
The same study reveals that, in the election year of the U.S. Presidential cycle, investors who were over-weighted in energy and financials did better than investors who were over-weighted in materials and telecommunication services.
Our chart this week shows the weekly closes of the Amex listed (XLE) Select Sector SPDR-Energy exchange traded fund plotted above the Amex listed (XLK) Select Sector SPDR-Technology exchange traded fund.
The XLE is a basket of large energy stocks and the XLK is a basket of large information technology stocks.
The 12-month October 2002-03 gain of the energy unit was about 11 per cent, while the 12-month October 2002-03 gain of the technology unit has been a hot 63 per cent.
We may now have a rotation opportunity on our hands. Note the recent greater strength of the energy unit relative to the recent strength of the technology units.
The Ned Davis study supports the asset shift from technology to energy. In the last six election years, energy gained 32.2 per cent and technology returned 7.6 per cent.
This obscure rule is a keeper so don't pass it around.
--------------------------------------------------------------------------------
Bill Carrigan is an independent stock-market analyst. His Getting Technical column appears Sunday. He can be reached at gettingtechnical.com on the Internet. |
