Are December Dogs an investor's best friend?
Sometimes the worst-performing stocks turn out to be the best, at least for a while.
By James R. Gorrie, Stock Traders Daily
Can you make a nice pile of money off the year's biggest losers in the stock market? You can if you know where to look. And what kind of companies should you keep an eye out for?
The ones to buy might be December Dogs. Those are very specific companies that meet a few criteria that will typically allow you to rake in some cash in the first couple weeks of the New Year.
Here's the profile of a December Dog:
· A well-known company
· A heavily traded stock
· A bad reputation, in the news, with public negativity surrounding the company
· It should have fallen at least 50% off its high in value during the year
· It should be at or near its 52-week low in December
· It should be selling off in December as burned investors take a tax offset
How do you find December Dogs? Stocks like Groupon (GRPN), Zynga (ZNGA), and possibly Netflix (NFLX) fit the profile of a very public fall, heavily traded, with a bad reputation. There are also trading programs that will do it for you once you input the criteria or you can get your research here. Scan for the candidates using a weekly or a monthly chart. It doesn't matter which one you use, but you want to be able to compress time to see price and volume trajectories.
Once you've identified 12 to 15 companies, narrow the field down to a handful of the best candidates. Identify your picks in the first, second, and third weeks in December, before making your play and executing your trade in the fourth week in December, when everyone else is selling their December Dogs.
The dynamic is simple: Shareholders of stocks that tanked during the year and are still tanking in late December will be selling those beat up stocks to capture the tax breaks and offset gains that they've had in other positions. This is called tax-loss selling. And that is exactly what you're buying in the last week of December.
With all of the selling done by late December, what happens the first trading day of the New Year? Since all tax-loss selling has been executed by the end of December, there are no more sellers of those stocks in January. Tax-loss selling at the end of the year literally takes out all sellers of those positions. Therefore, buy your December Dogs on the last trading day of December, hold them for a short period of time -- say two to three weeks -- and then sell on the upside in January.
And that's when you make your money. Add in the right leveraging strategy and you can make a very nice profit very quickly.
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