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Saturday, December 8, 2012

Fiscal Cliff pair trade

(Been debating whether or not to publish this post, only because I am not sure if the highlighted selling below is due to tax selling.)

The general market has been acting very very well considering the threat to the fiscal cliff. (Albeit, excluding the massive declines since Nov 6th.). At the moment, the market is not really worried.

However, internally, we are seeing a concern, most notably displayed by Apple.

AAPL has systematically declined over 20%. It has declined so much so that it is the most inexpensive of the large-cap tech stocks, as per comparative metrics. Much of this decline is being credited to tax selling from long-term holders.

The more and more I think about the tax-selling argument, the more I can see the justification to it. A look at some of the biggest gainers over the last two years include: IBM, ROST, TJX and CHTR. All these stocks started to see declines starting around the same time of the year. VFC is another name that saw a leveling off, but not as much of a decline. (Some outliers are MA and V. Their ascension has not skipped a beat.)

Looks like stock with big gains have been front loading the potential tax hike from 15% to 35%.

As the days close in on the end of the year, and the threat continues to loom, we may start seeing general market weakness. And the names that have been front loading the action see a tamer decline. The pair trade would be to short the SPY and be long names like AAPL.

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