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Our View
I have been right about selling the rallies this week, but wrong about buying the pullbacks. The sell programs that have hit the markets over the last few days have been oversized and tied to year-end tax and fed-rate hike jitters. Everyone thinks December is a big up month, but that’s not the whole story.
It does tend to be a good month for stocks. However, it’s limited to a few bursts, followed by a lot of chop. The best part of the rally is the Santa Claus rally that happens in the final 5 days of the year.
Tax-loss selling is the process of selling stocks at a loss in order to reduce the capital gains earned on an investment. Since capital losses are tax deductible, these losses can be used to offset capital gains and reduce an investor’s tax liability on their tax return. This has been a big part of the weakness in December and while stocks may rally, the tax-loss selling goes on right into the end of the year. And there are plenty of losers to dump this year!
The idea or strategy is to sell the loser while buying another stock, but a lot of people may just sell the losers this year.
Our Lean — Danny’s Take
This week was supposed to be a quiet week. No major econ reports or earnings. Next week we have the CPI report, the FOMC rate hike and quad-witch expiration. Yet this week so far has been full of nasty cross-currents.
There is clearly anxiety about the upcoming rate hike, but I am still looking for the PitBull’s Thursday-Friday low the week before expiration — so tomorrow and Friday. It's a high percentage that I am going to be talking to @realTraderDave about some type of option, like lotto calls to buy along with my regular futures trade.
As for today, the ES held above 3900 — and for now, the key 3920 level — so it’s hard for me to go full-on bear, especially after a 188-point drop over the last 4 days, with 152 of those points coming in the last two days.
Our Lean: