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At the end of every year tax loss selling and window dressing push some stocks down too far. Investors are looking to take losses on stocks to offset gains on other stocks for tax purposes. Portfolio managers are looking to unload their losers before they have to report their positions on December 31 to give the appearance they didn't make any big mistakes.

The selling pressure from both groups abates in January after the close of the year because it is too late to hide losses or reduce 2012 taxes. These stocks often rise as no one is left willing to sell at the steeply discounted prices. Hence the term the January Effect.

Because of the fiscal cliff negotiations, many investors believe tax rates on the wealthy will probably rise next year. Even if there is a deal that doesn't raise tax rates next year, the Affordable Health Care Act is already scheduled to place a 3.8% surcharge on investment income for the wealthy in 2013. This is leading tax planners to recommend investors with large gains book their profits this year to pay the lower 15% tax rate.

Normally tax planners would recommend waiting until the new year to book profits in order to get the benefit of deferring paying the taxes for an additional year. To offset large tax gains investors are also selling their losers, making end of the year trading this year even more tax sensitive than normal.

Vivus (NASDAQ:VVUS) is well positioned to rally from the January Effect once the tax loss and window dressing selling pressure subsides. Vivus is currently trading for $13.14 and has traded as high as $31.21 and as low as $8.60 over the last 12 months. The stock traded for over $20 per share between late February and mid-November on high volume, including 7 trading days with over 20 million shares per day. Many investors have a cost basis of over $20 per share and have large losses in the stock setting up the end of the year tax loss selling to offset gains taken on similar weight loss biotech stocks with large gains at the end of the year like Arena Pharmaceuticals (NASDAQ:ARNA). Arena began the year trading at $1.87 and is now trading for $9.47 per share, which represents a hefty fivefold gain. Portfolio managers also prefer to show investors Arena at the end of the year rather than Vivus. People who are selling for tax losses or window dressing must do so by December 31, 2012, and will not be selling in January; hence Vivus will have fewer sellers in January versus buyers for the stock setting it up to rise with what's known as the January Effect.

Vivus has an enterprise value of $880 million. The company's main product is the recently FDA approved weight loss drug Qsymia. Vivus shares sold off after initial prescriptions for Qsymia failed to meet analyst third quarter sales expectations in early November. However, while Qysmia had received FDA approval most health plans had not made a decision whether to pay for the new drug. Later in November Aetna (NYSE:AET) announced that it would cover the weight loss drug for people with obesity that had been unable to lose weight through other methods. Usually when one of the major health insurers decides to cover a product their competitors also agree to cover a product. Aetna's actions should allow prescriptions for Qysmia to begin to rise.

Dendreon (NASDAQ:DNDN) is also well positioned to rally from the January Effect once tax loss selling and window dressing selling subsides. Dendreon is currently trading for $5.03 and has traded as high as $17.04 and as low as $3.69 over the last 12 months. Dendreon traded for over $10 per share between early January and mid May, including 13 trading days with volume over 20 million shares per day. Many investors have a cost basis over $10 per share and have large losses in the stock setting up the end of the year tax loss selling to offset gains taken on similar cancer biotech stocks with large gains at the end of the year like Onyx Pharmaceuticals (NASDAQ:ONXX). Onyx began the year trading at $43.95 and is currently trading for $80.83 per share. Portfolio managers also prefer to show investors Onyx at the end of the year rather than Dendreon. People who are selling for tax losses or window dressing must do so by December 31, 2012, and will not be selling in January; hence Dendreon will have fewer sellers in January versus buyers for the stock setting it up to rise with what is known as the January Effect.

Dendreon has an enterprise value of $937 million. Dendreon's main product is Provenge, which is an immunotherapy for advanced metastatic prostate cancer. Provenge is very expensive and prescriptions have failed to meet Wall Street expectations. Dendreon's management over built the company and then had to make significant cutbacks. However, Provenge is a first generation product from a very new and innovative technology that can be applied to multiple cancer targets, and perhaps certain non-cancer targets. Dendreon holds many patents and is a takeover candidate for a large pharmaceutical company interested in investing in further research into the potential of immunotherapy.

Investors looking for January Effect stocks should be aware that some reach a low in November and early December and then climb before January as most of the sellers have already exited. Other January Effect stocks maintain selling pressure all the way into the last day of trading for the year. It would be wise to commit half of the capital to the play now and hold back the other half for a second round of buying if the selling pressure pushes the stock to new lows at the end of the year.

The objective of buying a January Effect stock is to look for short term gains. Some January Effect stocks recover the most by the middle of January and some continue to recover into the middle of March. Investors should consider selling half of their position in the middle of January and the rest of the position before the end of March.

Source: Vivus, Dendreon Set To Rally From The January Effect