(Ed note: first published June 2017): With investors making big profits this year in certain stocks, there will be many investors who will want to offset these profits via selling their losers to lock in their tax losses and thus reduce their tax bill. I have been watching the tax loss phenomenon in the market closely for the last 30 years, and time after time it’s the same script. I’m backing that the same results will spill out again this time.
Instos start selling in late May, hence market weakness
This can be a bitter-sweet time – but only if you sell late May and buy back in before July (that’s assuming you want to buy back in – in many cases sell and stay away). In the past whenever we see tax loss selling it usually begins early, as the instos move “ahead of the pack” and start their tax loss selling from late May.
The more illiquid the stock – the greater will be its fall over June. So any illiquid stocks you want to sell – do it early, because everyone else comes in over June.
Many don’t think about this until early/ mid June
In May you are not thinking about Tax time, but come June you begin to think – I’d better lock in those tax losses now before June 30. So over the years we tend to see many stocks (especially the illiquid ones) have really big falls that begin in late May & usually goes until the 2nd or 3rd week of June. Many of these stocks bottom around then & then start what can be in some cases really big recoveries that go from mid / late June usually until the 3rd week of July & then fizzle out. The tax loss stocks (biggest losers) are pushed by the brokers in early June & most investors like to make sure that they have sold them & received their cash well before the end of the Financial year. As a result many sell their tax loss stocks over the first 2 weeks of June & sometimes into the 3rd week of June – which sees these stocks really fall hard over this period.
Stocks usually bounce back hard from Mid-to-late June
From there - after big recoveries over the ensuing month - some will then sell off again, while others can hold those gains & keep going. The critical point is that the huge gains made over the 3 week window is to some extent a liquidity event, whereby the massive selling that was sitting on a stock for a long period of time ceases completely & the stock spikes back. But for the stock to kick on - its fundamentals must be supportive, if they are not then the stock tends to resume its down-trend…. Hence I’d look only at the buys or neutrals rated stock in this trade.
Over the last week of June most of the tax loss stocks(except any real disaster stories that don’t recover) – then begin a bounce that tends to go from the last week in June to the 2nd / sometimes 3rd week in July. Over that time I have seen many stocks recover between +10% to +35% off their late June low… While Quant studies have shown that stocks that fall -15% to -40% tend to bounce back +13% to +20% over the next few months
If you are thinking of selling – then just do it
If you are “thinking” of selling a stock for tax loss purposes – then go early & get it done as early as possible (May always a good time to get in early) before everyone else does late – and you can bet they will. A stock at 90c now could well be 80c in early June then 70c by mid June .. If you don’t & hold back, the stock may fall a lot more than you thought & you then get sucked in at the worst time into exiting. If you are intending to get back in, then wait (until mid / lat June) – the chances of the stock being a lot higher are very low, but the chances that the stock will be a lot lower– are very high. So wait until mid June on & when the stock looks like it’s in free fall & everyone then wonders & they say ... “what is going on with that stock ? Stay away..” Many times – nothing– it’s just a massive amount of tax loss selling into a thin or illiquid market that his having huge market impact. Sometimes the coy is forced to reply to the ASX & when (as most do at this time) – say there are no material issues – then the stock begins its violent recovery.
A key question you must ask yourself with EVERY stock
One question I ask when someone asks “should I hold this stock – I’m losing on it?” I say would you right now, at this price buy this stock? If they say NO – then the answer is simple – they are ‘hoping” it recovers & if you wouldn't buy it here & are losing money – sell it. Don’t “average down on a loser”–if that’s the main reason – then there is a good chance it will only get worse .
Once its gone out of your portfolio - I can guarantee -your mental state gets better as well – because you don’t have to look at it any more.
Out of sight - out of mind !!
They DO recover in July
Over the last 20 years, these tax loss stocks recover in June – Quant studies show the big caps bounce back +1% in July. While in Small Caps that have fallen -5% then recover +2% in July. This list will dominate the stocks that will be under pressure.
Here are the 50 worst stocks for the 2016/ 2017 Financial year THAT will be under pressure. Looking at both ASX 200 & Small Ords. Just a few that stand out stocks that I think should bounce hard over the next 4 weeks include .. MYX, APO, HVN, CAT , SUL, and JBH.
The Coppo Report
This article is an excerpt from The Coppo Report contributed to Livewire by Richard Coppleson, Director - Institutional Sales and Trading, Bell Potter. you can find out more here.