May in December?

12/17/2004 12:00 am EST

Focus:

Yola Edwards

Contributing Editor, Internet Wealth Builder and Top Stocks

The latest Internet Wealth Builder offers a ‘seasonal’ overview. Editor Gordon Pape, looks at the Santa Claus rally, while contributing editor Yola Edwards "has been checking out the malls" to find the best Christmas-time stock opportunity

"There are two phenomena that investors eagerly await each year, the Santa Claus rally and the January Effect," notes Gordon Pape. "The proverbial Santa Claus rally usually provides for significantly higher stock prices amid light seasonal trading, with a bounce in the weeks leading up to Christmas. This habitual rally is primarily the result of the confluence of the end of tax-loss selling, the growing thinness of the equity markets as we approach the end of the year, institutional window-dressing, and the tendency for investors to hold onto their capital gains until the turn of the new tax year.

"The January Effect is a ‘New Year’ stock rally that is supposedly the result of late December tax-loss selling, which depresses prices. Once the sell orders stop, stocks rebound. Small-cap stocks are generally more affected by this than large companies. The validity of these seasonal phenomena are hotly debated, but over the years the three-month period from November 1 to January 31 has produced the strongest gains for the overall stock market.

"Importantly, as we approach the end of the year, be sure to spend some time reviewing all your holdings. Look at every stock as if you were about to buy it for the first time and decide whether you would do so at the current price. If the answer is ‘no’, then it becomes a possible candidate for selling or taking part-profits. if you do plan to take profits, be sure to consider the tax consequences. If you sell this month, you will have to declare your capital gains on your 2004 tax return in April. Unless you have some capital losses against which to offset part or all of the gains, you may want to postpone the sale until the New Year. That would have the effect of deferring the tax until April 2006. Whether or not you decide to take action, this market may be running out of steam, so I'd caution investors to act accordingly."

"If you’ve been out holiday shopping recently you might have noticed that it’s pretty tough to find a parking spot at the malls," says Yola Edwards. "But are personal consumption patterns changing? Although sales at retailers such as Wal-Mart have been below expectations, the middle-market store sales aren’t off as much, and the higher-end retailers are gaining event more Some analysts are noticing an upscale trend. ‘There's definitely a trading up going on,’ said John Silvia, chief economist at Wachovia Securities. He also notes that in his hometown of Charlotte, N.C., he is seeing the upscaling of nearby malls and shopping centres with higher-end retailers and restaurants that people are standing in lines to get into. ‘People are tired of shopping down,’ said Patty Edwards, retail analyst at Wentworth Hauser & Violich. ‘The catch phrase of the year is affordable luxury.’

"To take advantage of the possible trend change, I reviewed the middle and higher-end store stock charts and found that the technical chart of The May Department Stores (MAY NYSE) looked the most interesting. The group operates 500 department stores in 46 states and the District of Columbia and Puerto Rico. It has six regional department store companies under 11 trade names, which include Lord and Taylor, Hecht's and Strawbridges, Meier & Frank, Foley's, Robinsons-May, Filene's, Kaufmann's, Famous-Barr, LS Ayres, and The Jones Store. On July 31 the company acquired Marshall Field's Department Stores.

"Shorter-term, though, there could be some weakness. However, any sell-off should be relatively shallow. The longer-term chart clearly indicates that a bottom is in on the stock. This means that a bottom appears to have been found in the stock – a support point where both buyers and sellers feel a comfort level or an equilibrium level. This is a point from which the stock has rallied on several previous occasions. After dropping to a low of $17.85 in March of 2003, the stock rallied by $18.63 from its lows to $36.48. It then retraced about two-thirds of that rally, dropping over the next seven months to a low of $23.79 in October 2004, which is a classic retracement. The fact that it was able to rally from that point indicated that the decline was at an end. The stock is currently a buy; once above $29.50, the technical pattern would suggest a target price of $35.74 over the next three months. In addition, the stock offers a dividend yield of 3.4%."

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