January Effect Trading Opportunities in Financials

There will likely be some very interesting short term trading opportunities in Financials over the next four weeks due to year end tax loss selling, and the well-documented January Effect.

The reason Financials stand out is because they've been the hardest hit this year due to the credit crunch and subprime mortgage issues, which makes them an obvious target for tax loss sales.

The entire financial sector is down for the year, and it has underperformed the S&P 500 by almost 8%. Further, there is a handful of particular financial stocks where the underperformance is much more extreme, thus creating some glaring opportunities.

I expect to see some of the big name financials (MER, LEH, MS, BSC) underperform the market through around Friday, December 21st (options expiry), followed by very strong gains through the first week of January.

Here are some links to a few good papers on the January Effect:

- Yes, Wall Street There is a January Effect!
- Month of the Year Effect
- The January Effect

..and some links to papers on Year End Tax Loss Selling:

- Tax-loss trading and wash sales
- Investors at the Turn of the Year

As my old college roommate likes to say... Lock and Load, Baby!

Disclosure: Long MER