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A Stocking Full of Nuggets

Alan Farley

We're heading into year-end at light speed, so I've put together a seasonal list for traders to review before the crowd returns in January. These diverse topics are too small to place under the trading tree, so I've made a stocking stuffer for you to dig into during this much-needed winter break.

Gimmie a Break

Are you even taking a break right now? Thin volume can make holiday trading a hazardous enterprise, but someone will be making money this week. It could be you, as long as you take the time to do it right. The most important thing to remember is staying liquid. No, this isn't a prescription for your office party hangover. If you trade through the holidays, pick stocks that attract unusual volume.

Find stocks that trade above their pre-holiday volume by getting up early and checking the breaking financial news. Of course, there are fewer market movers over the holiday, so you have to look harder to find them. Keep in mind that other traders with just as much free time on their hands will be looking for the same thing. The idea is to find each other early and take advantage of the late sleepers. The holidays will trigger very large price moves when the news is big enough and the crowd can find the play.

Hold On

You know all about tax selling and how it influences the market this time of year. But have you heard about tax holding? Traders and investors hang on to big gainers until Jan. 1 to avoid capital gains taxes. This contributes to an early new year selloff in stocks near their 52-week highs.

You can play this phenomenon in two ways. First, those with strong stomachs and deep pockets can sell these stocks short on the last trading day of the year. Too afraid of holding risky positions that might affect your New Year's party attitude? Then wait for January, let the stocks sell off for a few days, and buy them back at lower price levels. But don't stick around too long, because winners in one year tend to underperform the market the following year.

Still stuck because you don't know how to find these interesting seasonal plays? No problem: Just check back next Monday, when I'll have a tax-hold list ready to go.

Or Maybe Not

If you don't know about the wash/sale rule, you'd better find out in a hurry. This obscure tax code drives traders crazy and gives tax advisers a lot of new customers. The bottom line on the rule: Don't carry a stock into the new year after you've traded it during the old year.

Investorwords.com defines the wash/sale rule as follows: "IRS rule prohibiting a taxpayer from claiming a loss on the sale of an investment if that same investment was purchased within 30 days before or after the sale date." The rule is meant to discourage investors from selling at a loss just to get the tax benefit.

Now you're really confused, aren't you?

This is a case where the definition is more confusing than the concept. It's also a case where I can't help you, because I'm not a tax adviser. Whatever you do, make sure to seek counsel from someone who understands the unique issues facing short-term traders. Many financial advisers misinterpret how the rule applies to short-term trading, and their mistakes will cost you a lot of money.

Let the Software Fix It

Speaking of taxes, how can you organize all those short-term trades into a clean IRS format, without staying up nights writing Excel macros? My favorite solution is TradeLog, a pricey yet powerful software that will automatically dump your broker statements into multiple reporting formats, including IRS Schedule D. TradeLog adjusts easily to mark-to-market traders, as well as part-time hobbyists. Oh, did I mention this outstanding product also calculates wash sales?

What's the Bottom Line?

Finally, I've got a painful exercise for you to perform over the long winter break. Go back through all your trade tickets this year, and calculate how much money you paid in commissions to your broker. It could be quite a shock. For many RealMoney readers, high commissions make the difference between a winning and a losing year. If so, it's time for a change.