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Stock futures trading fractionally lower

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Stock futures are once again having some problems carrying over previous days gains as S&P futures are lower by 2 points, indicating a slightly lower open for stocks. NASDAQ futures are lower by 16 points and Dow futures are down 20 points.

Fair value for the S&P 500 today is $1.68. HL Camp & Company has their computers set for program buying at $2.98 and set for program selling at $0.48.

Jobless claims fall by 11,000

The latest weeks jobless data shows that first time claims for unemployment fell by 11,000 to 384,000. The four-week average fell to 438,000, the lowest since the week of September 22nd. Continuing claims for unemployment benefits rose 55,000 to 3.698 million, while the four-week average edged lower to 3.74 million.

Juniper Networks warns

Shares of Juniper Networks (NASDAQ:JNPR) are getting hit this morning in pre-market trading at $18.13 (-$4.80, -20%) after the networking equipment maker said it expects fourth-quarter revenues to be about $50 million below the original guidance of $200 million. The company said it believes pro-forma earnings will be $0.05 a share.

Questions from readers

Jeff: Could you explain a bit more about tax-loss selling? The theory behind this and that it creates "bounces." If as you say "it's time to say goodbye to this loser," then this stock should fall in price instead of going higher. Right?

Answer: I talk better than I type and the thoughts flow more easily. Here's what I'm talking about. The subscriber is right. When the tax loss selling comes, the stock should fall as supply exceeds demand! Now here's the $20 question. When is the last day an investor can sell a stock for a loss to realize that loss for year 2001 taxes? According to my calendar, that would be Monday, December 31st!

OK... since I talked about one of our picks last year in WorldCom (NASDAQ:WCOM), lets look at it here. I'll also show (now don't laugh) another stock I picked as a tax loss sell candidate in Redback Networks.

WorldCom Inc. Chart - Example of last year's action

The subscriber is correct. Tax loss selling does cause a stock to decline. Market makers know that and boy did it show from October-December of 2000. Some have heard that October is a bad month for stocks. Part of the reason is that it marks the end of the year for many mutual funds. That's when many close their books on the year and tax-loss selling for them ends. If you hold a mutual fund, you know that you are sensitive to paying capital gains. A mutual fund manager knows this and will sell a loser with a big loss, to offset profits from other positions found earlier in the year. The idea of trading a tax-loss bounce is simply based on supply/demand. You can really see from the above chart that WCOM was being driven into the ground. Yes, there may have been something fundamentally wrong when we profiled the stock as a bounce candidate for January. But we felt the decline in December was due to extreme selling brought on by investors that were simply dumping the stock from their portfolio, booking the loss to offset the gain. The bulk of investors needed to "realize" the loss in 2000 to offset their capital gains for that year. By offsetting gains found from other stock investments, it may have made sense to sell WCOM for some.

But that selling may have created the buying opportunity for a trader that understands supply/demand. The thought of trading a tax-loss selling bounce is to identify a stock that is most likely being sold for no other reason than the booking of a loss to offset a gain. When January 2nd rolls around, any losses booked on that day have to be carried forward for an entire year. The bulk of tax-loss selling takes place in the latter part of the year, not the beginning.

Well... WorldCom's stock did just as we thought it might. Actually, it did a lot better than I ever imagined. A trader that bought the last day of December near $14, saw a big jump higher in January. I don't remember any news that came out to drive the stock more than 50% higher in the following 9 trading sessions.

To some it makes sense that all the selling may have been done from October-December and when January came around, there was a sharp shift in the supply/demand balance. As it is with just about everything, after awhile, the increased price finds fewer buyers as less value is then perceived and supply/demand reaches equilibrium. If you got a 10% gain in 5 days what would you do? If you got a 20% gain what would you do? If you got a 50% gain in 10 days what would you do? If you haven't said sell yet, then don't try and trade the tax-loss sell trade. It will most likely be a disappointment.

Wow! It's late at night. I'll talk about one of our other trades for a tax loss bounce that didn't go so well. We will learn from it and know what to expect going forward.

Jeff Bailey
Senior Market Technician
Option Investor

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