Screen for Window-Dressing Stocks

When the whole market seems to be ending the year strongly, many folks are looking for stocks that may be overdone to the upside. One potentially successful strategy as the calendar turns after a strong year is to sell or short stocks that meet certain criteria I'll describe below. I call this the “window-dressing reversal trade”.

To understand why this strategy works, one needs to understand a couple of basics about professional investors. First, many managers like to have their winners proudly on display in year-end reports to clients and to have buried the dead (their mistakes). Second, many professionals (and also non-professionals) like to defer taxes on gains to the next year. These two factors lead to some artificial upward pressure on certain stocks that can reverse quickly in the first week of the new year.

To try to identify potential candidates, I ran a screen with the following criteria:

• S&P 500 member
• YTD price return > 40% (compared to market up about 25%)
• QTD price return > 5% vs. the S&P 500
• 50dma vs. 200dma > 120%
• Price/52wk high > 95%

We're looking for stocks that have done really well this year and have run up in particular into the end of the year.  Here are the 58 names that made the cut when I ran this screen Monday:

 

You can see that the winners are spread out over 8 of the 10 GICS (Global Industry Classification Standards) economic sectors. Within each sector, I sorted the names on YTD return in descending order. I included an additional column, Price Momentum Index. This one is essentially a measure of the number of standard deviations away from a trend; it indicates how short-term overbought the stock may be. 

If you are looking to narrow the list down some, I suggest focusing on the bigger names as they are even more subject to the window-dressing effect in my opinion. Also, it might make sense to check the short-interest ratios. If you happen to own these stocks, you might consider selling them, especially if there'd be no tax consequence for you.  

Regards,
Alan Brochstein
Founder, Invest By Model and AB Analytical Services
TradeKing All-Star Commentator

 

 

In reading content in the Trader Network, you may gain ideas about when, where, and how to invest your money. Although you may discover new ideas or rationale that may be compelling, you must ultimately decide whether or not to put your own money at risk. Consider the following when making an investment decision: your financial and tax situation, your risk profile, and transaction costs.

 
Alan Brochstein maintains a cross-marketing relationship with TradeKing.