The Most Wonderful Time of Year Can Be Dangerous for Investors
The holiday season poses both opportunities and dangers to investors.
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Holiday trading has little to do with the merits of individual stocks, but it offers both opportunities and danger for market participants.
The period of thin market volume between Christmas and New Year's Day often produces positive performance for the indices and is well-known by the name "Santa Claus Rally." However, it also produces elevated volatility and can result in significant drops for some individual stocks.
The issue is that many large investors make moves for tax reasons and positioning that produce significant volatility in a thin environment. Depending on how you handle it, this enhanced volatility can be either a problem or an opportunity.
One of the opportunities that arise is that many stocks that have performed poorly during the year are sold so that investors can harvest the tax loss to offset other gains in their portfolios. Some of these stocks are fundamentally strong but are sold purely based on poor price action.
When there are big gains in a narrow group of large caps like the Magnificent Seven MAGS, there is an inclination to push those mega-caps even higher. Investors don't want to trigger taxes on gains, and money managers want to show them as part of their holdings. On the other hand, smaller stocks that have done poorly are dumped for tax losses and to clean up portfolio holdings.
In this environment, the indices are likely to be more misleading than usual. The moves that most investors are making are stock-specific and have little to do with the technical health of the indices.
Typically, at the end of the year, there is also a bout of profit-taking in some of the biggest winners by investors who are not concerned about taxes and want to position for the new year. There are investors who like the idea of raising substantial cash and starting fresh when the calendar rolls over.
Early on Thursday morning, the action looks very weak, with Bitcoin IBIT hitting around 3.5%, which pushed it back to under the $100,000 level. In addition, there is selling in the semiconductor sector SMH, and the Russell 2000 IWM is giving back a chunk of Tuesday's gain. This may be the most wonderful time of the year, but it can be very dangerous for some stocks.
At the time of publication, DePorre was long IBIT.
