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We have all heard, "buy the rumor, sell the news." We'll the latest
rumor is that tax selling occurs in late December and that January sees
a strong advance as buyers step back in; hence, the large number of
CALLs. The public is expecting to capture the January buying surge as
has happened for a number of years now. However, my analysis of market
conditions doesn't concur with this hypothesis. Here is why. Since 1997
has been a very good year for the market most participants are holding
profitable positions, which doesn't add up to large sell programs to
capture capital gains losses in late December. Heavy tax selling would
occur only in a year in which the market performed very poorly and,
therefore, many investors would easily be able to roll losses into new
issues with equally good potential for profit in the upcoming year.
Therefore, with most investors holding winners, the strategy (I think)
is to take gains by selling in January! This would conveniently allow
the capital gains to fully work for the investor into the tax reportable
time frame of April '99, which gives a nice tax-free holding period to
leverage the gains into larger profits. This is NOT being talked about,
and again, it's the sheep (the CALL owners) being lead to slaughter with
the media circulation of half-truths and invalid assumptions.
However, having said all of this, I still think the market has an upward
bias for several reasons. First, there is heavy volume on advances and
lower volume on declines, which is opposite to what would occur in a
weakening market. Secondly, the Dow Industrials should be the last index
or average to peak as astute investors recognize the overall signs of a
telltale market collapse and flee to quality, which has always been
represented by the Dow leaders. This is not what has happened as of yet.
Finally, I believe that as the tech issues have lead the market higher
they will also lead it lower. However, with the recent blood bath in
tech issues and no real significant correlation or follow along by the
general market, a dynamic divergence has occurred that I believe will
only result in a snap-back of the techs with a consequent sling-shot
effect to propel the general averages to new all-time highs.
Ralph Volpe
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