Page 492 - THE MARKET WHISPERER

488 PART 15 - Special Occasions, Special Rules

some “window dressing” in the form of prettying up investment portfolios
with a few improvements. One of these improvements is dumping weak
stocks that caused losses, and buying up strong stocks. This is how they
show their shareholders a different list at the end of the quarter from the
actual list they traded with during most of the quarter. This improved list
leads clients to feel that the fund managers know how to choose the right
stocks. Additionally, on the last day of the quarter, they tend to prop up
the price of stocks they are holding and prevent them from falling. Since
most of the money in the market belongs to funds, the outcome is that at
the end of the quarter, the market usually does not drop and sometimes
even trends up. Of course, poor monetary outcomes eventually float to the
surface, but the window dressing phenomenon is known and will likely
continue.

What does this mean for you? Simply this: do not expect the markets to
push lower during the last days of the quarter. If the market needs to drop,
it will do so at the start of the next quarter. You can also expect that weak
stocks from the previous quarter will continue falling, since the funds exit
them to swap for stronger stocks. On the other hand, strong stocks being
bought up by the funds will continue climbing.

The Market at Year’s End

What happens at the end of the year to a stock that showed strength
throughout the year? Will it pull back? Will buyers realize profits?

Indeed, for reasons generally tied to taxation, the pullback will generally
not come at year’s end. In the US, taxes are paid only on profits from stocks
sold at a profit during the calendar year from January 1 to December 31.
An investor postponing the sale of stocks showing a profit to the start of
the next tax year can delay paying the tax by a full tax year, and perhaps
end up not paying it at all, depending on the overall status of the next tax
year.

Conclusion: strong stocks which rose during the year are expected to
continue rising in the final weeks of the year, since investors avoid selling
due to tax laws. By contrast, weak stocks are expected to sell in order
to “lock the loss.” In other words, a strong year will generally end with
continuing new highs and a weak year will typically see continued lows
until the end of the tax year.

It is commonly believed that investors who avoided “locking profits”
at the end of the year will realize their profits at the start of January. This