We had a textbook example of holiday trading today. It was painfully thin but broadly positive. We closed weak again but managed to hold on to a good portion of the gains. There just wasn't too much interest in locking gains. Today is also the traditional kick-off of the Santa rally, which is supposed to last a couple days into the new year, so there were plenty of reasons for an upbeat atmosphere.
This thin but positive action should continue next week. But as I discussed this morning, there is a good chance of a flurry of selling. We usually have one day of fairly aggressive profit taking at the very end of the year, and it is easy to be caught by surprise. While there are plenty of folks looking to trade the positive end-of-the-year sentiment, there are also some folks looking to make adjustments before we wrap up the year, and they can cause some upheavals.
Now is a good time to start reflecting on how we might improve trading results in the year ahead. I'm not a fan of predictions, but I am comfortable in forecasting that 2015 is going to play out much differently than 2014. That isn't a very bold prediction, but now is the time to start preparing ourselves mentally.
Have a great weekend. Return that ugly shirt and catch up on your sleep. I'll see you on Monday.
Typical Holiday Trade
- Bears just don't even bother to trade.
The day after Christmas is the day during the year that is most likely to have a positive return. So far, it is living up to its status, with some very buoyant action. Breadth is running a frisky three-to-one positive and we have some good bounce action in our old buddy, the biotechnology sector. All major sectors are green and there are no notable pockets of weakness to be found.
The key on a day like this is that bears just don't even bother trying to fight it. They figure the bulls are going to keep on pushing, so it is better to just do something else and wait for the short-side setups to develop next week.
The most impressive action today is the continued bounces in biotechnology, which looked very precarious on Monday and Tuesday. They bounce back nicely on Wednesday and names like JUNO (JUNO), Gilead (GILD), Kite Pharma (KITE) and bluebird bio (BLUE) are building on the moves again.
I'm not doing much new, but I did add to a position in CNinsure (CISG), which has very heavy early volume and is likely seeing some sympathy from China Life Insurance (LFC), which is up very big today. This is a typical "holiday" trade. It's a good day for these sorts of plays if you can find them.
Dec.26, 2014 | 7:48 AM EDT
Don't Count on Tax to Move This Market
- Buying for tax reasons is not actually guaranteed.
"The hardest thing in the world to understand is the income tax."
With just four days of trading left in 2014, the big question for us to contemplate is whether we continue to push to new all-time highs, or whether we see some last-minute profit-taking.
The conventional wisdom is that, for tax reasons, sellers delay taking profits on winners until next year, while they look to book in the losses on losers before the calendar turns. That certainly makes sense but, like most tax matters, it is much more complicated and there actual may be potential for some bouts of selling before the end of the year.
The first thing to keep in mind is that a huge amount of stock is owned by "tax-advantaged" entities, such as IRAs and 401ks. They don't pay taxes and so the timing of sales is irrelevant.
Second, there may be taxpayers with capital loss carry-forwards or recognized losses that they may want to offset. They actually will benefit from locking in losses in the current year to reduce their capital gains.
A third consideration is that many very active traders use "mark to market" accounting. They recognize gains and losses based on the closing price on Dec. 31, regardless if they actually sell or not. There is no benefit to them to forego taking gains until 2015.
For those reasons, there is strong potential for some bouts of selling pressure before the year ends. If you look back at 2012, we had five straight days of selling and a loss of over 3% in the S&P500 before we bounced on Dec.31. In 2011, the S&P500 lost 1.3% on Dec. 28.
The important point is that, while seasonality is generally positive and we have some good reasons for why things should hold up, there is the potential for some quick selling. It is important that we not be too sanguine or lackadaisical.
The volume is going to be extremely thin today, but days like this tend to favor the bulls, who seem to be more willing to work during the holidays than the bears. For some reason, it's the bears that tend to exit the market and leave the bulls to move things around a bit.
That is probably another reason we often have this sudden selling bouts at the end of the year, when the bears do decide to make an appearance.
As you might guess there isn't much news flow out there. China has had its best two-day gain in five years on hopes that the government would make some moves. Oil is bouncing a little and Russia has rebounded as well. Japan continues to battle a weak economy.
At the moment we have a slightly positive open on the way.
The bad news is that it feels like Monday morning. The good news is that the weekend starts tomorrow.