Beginners Series Webinar: Join us on Friday, December 4^th, at 2 PM (ET) for our NDW Beginners Series Webinar. This week's topic is Creating a Custom Model. Register Here.

We are excited to announce phase three of the Nasdaq Dorsey Wright Model Builder with the launch of Matrix and FSM-based Relative Strength (RS) Testing Service. As part of this launch, we are granting you free access to the Service for the remainder of 2020. The tool is designed to help you more easily design, test, implement, and monitor custom models powered by the Nasdaq Dorsey Wright methodology. Through the end of December, be sure to join us each Thursday at 1 pm EST for a custom modeler demo presented by the analyst team.

11/12/2020: Matrix Model Builder Demo Replay- Click here

11/5/2020: FSM Model Builder Demo Replay – Click here

Click here to register for future Nasdaq Dorsey Wright Model Builder Demos

December is historically a strong month for stocks (and the momentum factor), producing positive S&P 500 (SPX) returns in 46 of the past 62 years, the highest count of any other month. However, after a monumental rally for equities many wonder if there is any gas left in the tank for the popular benchmark. While we cannot know for sure, looking at Novembers past we do see that after a positive month December still closed in the black 73% of the time, on par with its raw average. This “win percentage” only drops slightly if we look at Novembers where SPX gained over 5%, as 67% of Decembers were still positive. Although one thing to keep in mind is that December has historically produced an average return of 1.39% since 1958, and following a positive or strongly positive (5%+) November the returns are slightly below the historic monthly average.

When we increased our timeframe, a positive November also signaled a favorable path for equities in the new year with 80% of returns positive six months out. Note the medians are higher in each instance as well, indicating a positive skew. So if historical precedent decides to mean revert at the end of 2020, we could likely see another positive month but perhaps not to the same degree as usual.

This is the time of year when investors sell laggard stocks from their portfolio to realize losses before the end of the of year and offset any taxable gains they may have. Last Friday, we published an article on tax loss harvesting with a list of stocks that may be good candidates to sell for this purpose.  When many investors are selling the same underperforming stocks in the last few months of the year it creates the potential for those stocks to become oversold and bounce as tax selling subsides. 

Here are a few guidelines about tax loss harvesting which are also good to bear in mind when attempting tax loss bounce plays as the tax rules can impact when investors sell (and potentially repurchase) these stocks. First, consult your CPA for the specific long-term and short-term holding periods as well as how the tax rates affect your customers. If selling a long position for a taxable loss, the trade date must be on, or before, December 31st, 2019. The IRS requires that the trade date be the 31st (this year), not the settlement date, which is a source of some confusion each year. Current tax laws also limit the window for avoiding wash sale treatment, whereby an investor must have transacted buys in November (or before) to double a position, in order to sell a matching position for a capital loss on December 31st. Also, to avoid other aspects of the wash sale restrictions, you cannot repurchase a stock sold for a loss for 30 days following your tax loss sale. We certainly are not tax professionals and do not solicit tax advice, but those are some tax basics for this time of year. Again, we recommend that you consult your CPA for the specific rules.

To reiterate, the basic concept of tax loss bounce plays is to capitalize on saturation of supply caused by tax-loss selling of weak, depressed, often small-cap stocks. Those are the stocks most prone to being sold (typically towards the end of the year) to offset gains in one's portfolio (for tax reasons). Typical tax-loss selling brings a weakened stock down even further as we near the end of the year - this is part of the “Pre-January Effect” - but eventually, all those that want to sell for tax reasons have already done so, and the stock finds a bottom. Here’s an example – Adtalem Global Education Inc. ATGE.

ATGE Adtalem Global Education Inc. ($28.93) - Business Products - is a 0 for 5’er that ranks 84th out of 92 names in the business products sector matrix. The stock has been trading in a negative trend since May of 2019. ATGE is down just over 18% this year and around 50% from its 2019 peak, making it a prime candidate for tax loss harvesting. There are already some indications that ATGE may have found a near-term bottom and that demand has increased as it formed but did not break a double bottom at $24 in October, before reversing up and giving a double top buy signal at $28. ATGE is currently trading around $29 and does not face any overhead resistance on its default chart until $33, where its bullish support line currently sits. The nearest support is more than 20% away, so those interested playing a potential bounce may wish to use a dollar or percent-based stop.  

Keep in mind that most of these plays should be considered aggressive in nature (more of a bottom fish play), as they are typically both counter-trend, and often have negative RS, and therefore are specific just to short-term holdings. You need to be willing to take profits upon getting a bounce, sticking to the reason why you are buying the stock, especially if a bounce does not impact a change in trend or RS. Furthermore, if you get to the 3rd or 4th week in January and you have not seen a bounce in the stock you are playing, then sell it. As well, be sure to look at the chart of any names you choose to buy in order to set a stop loss point on the downside. In some instances, you will need to set a dollar amount stop loss point if no viable PnF breakdown or violation of support is available. With that, here is this year's list for tax loss selling bounce candidates, with the focus on Small Cap stocks. This list can be found under "DWA Portfolios" in the Portfolio tool and it is called "Tax Loss Selling Bounce Plays 12.3.20” or by clicking here. 

Tax Loss Selling Bounce Play Candidates

Data as of 12/2/20. 

As we’ve seen a broadening out of the equity markets from domestic and international or large and small, fixed income as an asset class has weakened from an asset class group scores perspective. Currently, there is only one fixed income group that has a positive score direction which is Convertible Bonds. It’s probably not a coincidence that this is a group with a strong positive correlation to equity markets. Even a group that was extremely strong over the past few months has weakened significantly, as the Inflation Protection group has a negative score direction of 2.12 despite a continuation to the downside for the US Dollar. The low rate environment has investors struggling to find areas of strength to fill out their fixed-income allocations.

With fixed income weakening as an asset class, there a good number of groups with high overbought/oversold readings. A few of these groups are All Municipals, Floating Rate, Corporate Bond High Yield, and a few global fixed income groups. These groups are also exhibiting shorter-term momentum characteristics as they all have held on average positive weekly momentum for three or more weeks.

The Emerging Market Income group is one area that has an average group score above 3.00, and more specifically local currency bond funds have seen tailwinds from the falling dollar environment. One such fund is the VanEck Vectors J.P. Morgan EM Local Currency Bond ETF EMLC which has a suboptimal fund score of 2.84 but a highly positive score direction of 2.19 highlighting its improvement over the last six months. Recent price action has put the fund into heavily overbought territory with a weekly overbought/oversold reading of 81%. EMLC offers a yield of 5.27%.  Even though EMLC isn’t scoring above the 3.00 threshold, it will be a fund to monitor as strong and improving areas within fixed income are fairly slim.

Municipals are another area that, despite score deterioration, have positive weekly momentum along with high weekly overbought/oversold readings. The All Municipals group has an average group score of 3.00 but a negative score direction of 1.61. The group has an average overbought/oversold reading of 199% with average weekly momentum of 4.46. The iShares National Municipal Bond ETF MUB has a fund score of 2.67 and is trading in a positive trend. In terms of its trading band, MUB is actionable with a weekly overbought/oversold reading of 61% and offers a yield of 2.18%.

With fixed income as an asset class taking a backseat to domestic and international equities, these are a few areas to keep an eye on as potential areas to fill out your client’s fixed income sleeve. Equities have taken the lion’s share of attention as of late, but it is still important to monitor fixed income as it is typically a portion of clients’ portfolios. A few of the areas discussed may not be ideal in terms of average scores or direction, but they could potentially be additive in the future. As always, be sure to visit the Asset Class Group Scores page to stay on top of market trends and changes.