Bell Potter

Tax loss selling. Today I look at the 'index impact' and how this time the whole market will be smacked because so many big cap stocks will get hit. This comes as investors crystalize capital losses before the end of the Australian tax year, which ends on the 30th June. Institutions clean their books and in some cases completely dump a holding so that they do not own it by 30 June. This is particularly applicable to high-profile disasters. When they publish their portfolio in the annual report, showing exactly what stocks they held on 30 June 2016, they don’t want shareholders or clients to focus on a “bad holding”. I have looked at tax loss selling over the years, and it begins earlier than most realise – around now.

It usually goes for four weeks until the third week of June & then some stocks start to recover.

Looking at this year the ASX 200 since June 20 last year is down just 2.56% - seems like it’s not too bad but then again, not too good either. But of the ASX 200 stocks just 71 are down while the other 129 are up. In other words, just 35% of stocks are lower – so under that scenario, you’d tell me to shut up & don’t mention tax loss selling since it won’t have any effect on the index. Look at the numbers! Only 35% of “stocks” in the index are down – so it’s irrelevant…

Wrong. It will - and it will be big. Why?

Because when you dissect those stocks it tells me a very different picture, and it’s dreadful. Of the ASX 200 only 35% of stocks are lower – BUT of those stocks, there are a large number of stocks that are heavily weighted in the index. In fact, those 71 stocks (or just 35% of the ASX 200 stocks) make up 56% of the ASX 200 – that is significant. Over half the stocks by index weight in the ASX 200 are lower and thus, vulnerable to significant tax loss selling.

This table shows all the 71 stocks that are down so far this financial year.



As we know the top 30 stocks have had a terrible time in the last few years & that seems to explain what we are about to see.

The table below shows the top 30 stocks of the 71 that are down – ranked by the index weighting.



The ASX 200 will get hit, and it can’t withstand what is coming

Now it stands out that of the ASX 200, 30 stocks that make up 53% of the index are all candidates for tax-loss selling. The average fall of these stocks is 15%, so it’s quite significant for big caps.

Being early is good, but also the hedge funds which come in to short will also do well. In fact, quant studies show that shorting potential tax-loss selling stocks during late May has generated positive alpha in 18 out of the past 20 years. This is going to have an impact on the market from; 1) institutions selling tax loss stocks; 2) retail investors selling tax loss stocks; 3) hedge funds shorting tax loss stocks.

Start selling in late May

This can be a bittersweet time, but only if you sell late May & buy back in before July. That’s assuming you want to buy back in – in many cases sell & stay away.

In the past whenever we see tax loss selling it usually begins early, as the institutions 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.”

Over the years, we have tended to see many stocks (especially the illiquid ones) have really big falls that begin in late May. Usually, this continues until the 2nd or 3rd week of June. Many of these stocks bottom around then and start what can be, in some cases, really big recoveries that go from mid/late June until the 3rd week of July and then fizzle out.

History shows big caps and small caps fall on tax loss selling

What is worth highlighting is that quant studies prove all this – as these tax loss stocks underperform the market by significant margins in June. The large caps fall by ~2.5% & the small caps fall by ~5%

What is of even more significance, looking at the last 20 years of tax loss selling, when the big caps are down 10% or more, then they have fallen another -2.5%. This financial year, 30 of the large cap stocks that have fallen -10% or more. In total, we have 18 stocks. These 18 stocks make up 27% of the ASX 200. If history repeats here, then these stocks are likely to be sold off -5% in June while the other 12 that make up 26% of the ASX 200 should be down -2.5% on average.

So these 18 big cap stocks are candidates to be sold off -5% in June. Hence, the index will be hit in June.

Stocks that will have a big impact on Index & are down -10% or more this F/Y



Tomorrow I’ll look at the specifics of tax loss stocks and why you need to move early in these trades.

This is an extract taken from The Coppo Report. For more information: (VIEW LINK)


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Simon Samuel

I'm not so sure there'll be much tax loss selling because there won't have been much capital gain made in stock markets to require an offset

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