I expect a change in the market demeanor particularly on dumpers starting next week. Actually think it has already started. Here is the theory:
It is widely known that funds have been doing tax loss selling. They do this if their fund value is down over the year, but any stocks that they have sold at a profit, will result in the holders of the fund paying taxes, capital gains or short term. (If the fund holds the losers, they simply have a low value on the fund not an actual loss). It is tough to swallow, picture it this way, fund manager to investor "Yes your equity is down 20%, and oh, by the way, you owe $15,000 in taxes", so thats why they sell the looser.
The fiscal year for the funds is over as of yesterday, so the tax loss selling incentive is gone.
Let's take notice of the predominant pattern on dumpers over the last two months. Throughout September and the beginning of October, dumpers would dump hard, and be multi bottom,, ie dump 20%, then to 30 and 40%
some as much as 60%, achieving 5-6 bottoms before a turn around. This I believe a result of competing firms to get rid of the shares. Of note to investors , the stock often had no rebound to speak of.
The last two weeks however, have been a bit different. One and two bottom dumpers then they run. A few have gone to third bottoms and then turn very fast. The reason ?
I believe that most of the funds who needed to tax loss sell were done, but some who owned a disappointment needed to get rid of it. So the battle has ensued, the unloader sells hard and the one who has unloaded already buys hard when the value has been perceived. I have seen a few stocks recently dump to certain level and trade a million shares with out an uptick or down tick, one fund needs to get rid of the shares and the price is supported by competing firms for the cheap shares. Then when the fund is done dumping, the stock runs 2 bucks.
Any way what does this theory do for a trader ? Well I suppose that for the trader it is more important to take note of the pattern than the reasons for the pattern. Should be interesting to watch none the less... |
