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WINDERMERE, Fla. ( Stockpickr) -- A trading strategy that's very popular among traders on Wall Street is to buy the worst-performing stocks of the year in the final days of December, hoping that these stocks will experience a monster rebound in the new year.
The idea here is that large money managers tend to dump their losers and take the tax losses in December to offset winning trades and reduce their reportable capital gains. This trading strategy is known as the January Effect, which is the tendency of equity prices to rise during the first month of the new year. The effect is most predominant for low-priced stocks, or stocks that trade under $10 a share.
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These beaten-down low-priced names tend to rebound huge once the tax loss selling is done. This makes for some great trades if you're willing to understand that this is simply a trading strategy, and not an investment for the longer-term horizon. Market players should simply look to flip some extremely beaten-down low priced stocks into 2012. Traders should look for 20% gains or more for some of the names I am going to present.
The key here is to use a strict trading discipline so that you don't get caught long these stocks if the January Effect never reaches them and they continue to downtrend. I will outline a trading plan for each name I present so you have an idea of how to time the trade.