Santa Brings Cheer for TOL, MER

Besides filling their tummies, last week's tasty turkey should have warmed market participants' memories of festive holiday seasons past. Here's why I think we'll enjoy a Santa Claus rally late next month:

It's the fourth quarter!

While I believe a good deal of the blame for the recent market mayhem goes to the Fed for shifting to neutral, let's not forget that it's the fourth quarter. It's not so much the time of year for roasting chestnuts as it is for writing off the kitchen sink by ailing homebuilders, lenders, investment banks, automakers and other impaled companies whose shares drive the major indices.

This quarter's parade of write-offs seems to have blindsided the market, but it should not have. Every Benjamin Graham and his mother knows that America's sick and wounded will take the opportunity to wipe the slate clean now and hope to start '08 anew.

At some point, hopefully soon, charge-off warnings should peter out. However, we'll still have to contend with another phenomenon indigenous to the fourth quarter: tax-loss selling. I'm sure it has already played a role, but it could continue as investors trade losses in companies like Beazer Homes (BZH - commentary - Cramer's Take) for new interests in shares like Toll Brothers (TOL - commentary - Cramer's Take). (Despite my example, a good deal of tax-loss selling is not replaced with new holdings in the same industry; this is probably much more common within institutional portfolios.)

When we run the final lap of a losing year, you can expect stocks to generally sell off further. However, the trend also provides greater likelihood for a strong "January effect." The important point is that at some point before the end of the year, tax-loss selling and fourth-quarter warnings should run out of fuel, leaving scavenging value investors ample pickings for the winter.

To take advantage of this opportunity, I would seek the top ideas in weak industries whose valuation may be most unjustly penalized because of the circumstances outlined above. These names will have been sold off alongside their more troubled peers, but they will also likely be added into many portfolios whose charters or strategies call for diversification and industry exposure. In homebuilding, for instance, I view Toll Brothers as the best of the best.

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At the time of publication, Kaminis had no positions, although positions may change at any time.

Markos N. Kaminis, the Wall Street Greek, is currently building his own financial advisory business. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Kaminis appreciates your feedback; click here to send him an email.