What are we looking for?
A strategy that will take advantage of the tax-loss selling season.
More about today's screen
At the end of every year, investors big and small sell their losses to take advantage of tax losses. But there is another way for investors to take advantage of this time of year.
Byron Berry, the strategist at Byron Capital, has crunched the numbers for the last few years and found that a strategy of buying the stocks that have performed best on the S&P/TSX composite to the middle of November, and selling the worst performers, is a way to beat the market over the concluding weeks of the calendar year.
Here is how the strategy worked in recent years. The table compares the performance of the top decile of stocks (the ones that are up the most to mid-November) compared to the bottom decile. (Deciles are determined by year-to-date performance to Nov. 15, while the stocks in the table are ranked by year-to-date performance to Nov. 22.)
Average Gain, Nov. 15 - Dec. 31
2006
All Equities: 5.45% First Decile: 10.00% Tenth Decile: 5.31%
2007
All Equities: 0.69% First Decile: 1.03% Tenth Decile: -2.36%
2009
All Equities: 5.22% First Decile: 5.00% Tenth Decile: 6.81%
Mr. Berry believes the strategy didn't work in 2009 because the market had an unusually sharp rebound of 31 per cent, versus a loss of 35 per cent the previous year.
"We believe 2009 was an unusual year and that 2010, with a year-to-date return of 8.4 per cent, is more like 2006 and 2007 than it is like 2009," Mr. Berry said in a research report. "Thus, we believe 2006 and 2007 will provide a better guide as to how markets will perform."
Note that one stock to avoid in this strategy might be Western Coal and any other takeover candidates.
Here are the top and bottom decile stocks.