In the last few days, in the context of a better market, many names saw strong short squeezes. Nokia (NOK) and Research In Motion (RIMM) were particularly favored, because not only did they have heavy short interest -- 8.4% of Nokia's shares were sold short; 18.5% of RIMM's were as well -- but both also saw credible catalysts to light the squeezes.
Nokia saw such a catalyst in the seemingly welcome reception for the Nokia Lumia 920 and 920T, which reports of "out-of-stock" situations in several places, including China. RIMM saw the spark in constant news and hopes about the impending BlackBerry 10 launch.
So What's The Problem With Year-End?
It's rather simple. As it stands, 2012 is turning out to be a decent year for stocks. The S&P500 (SPY) is up 11.4% year-to-date, and the Nasdaq (QQQ) is up 13%. Select widely-held stocks such as Apple (AAPL) are up even more, with Apple being up 39.3% year-to-date.
With 2012 having been quite volatile even if positive, with, for instance, Apple having traded over $700 before plunging all the way back to where it stands now (and even lower), it's quite likely that a good deal of capital gains were realized along the way.
And that brings us to the problem. In most years, tax selling is already a significant event, with investors selling some of their losers near the end of the year to offset the realized capital gains. This is also reinforced by the fact that the fiscal cliff might have led more investors to take profits during 2012 -- as opposed to 2013, where capital gains taxes might be much higher. This all means the effect could be even stronger. So widely held stocks that suffered losses during the year are bound to see more selling closer to year-end.
Such is the case with RIMM and Nokia. Although both stocks have seen a huge rebound in the last few weeks, both are still negative for the year. RIMM is still down 20.5% since 2011 year-end, and Nokia is still down 27.6% from the same time. Also, both RIMM and Nokia have fallen massively over the last few years, so it's likely that a lot of their shareholders still have large losses they might realize in these names.
Given this effect, it's probably wise to sell RIMM and Nokia into the present rallies, even if one plans on staying in the names come 2013. This can be achieved by selling between now and the end of November, and then buying back the names after a month plus one day has passed (this ensures the sale is valid for booking any existing losses).
Nokia and RIMM are two stocks that are very likely to get hit with tax selling near the end of 2012. As such, it might pay to anticipate such selling and sell into the present rally, even if one wants to stay in those two names. Then closer to 2012 year-end, the tax selling can be used to re-establish positions.