Despite the recentmarket weakness, many traders and fund
managers have enjoyed big gains this year. Even after the election
week sell-off, the S&P 500 and Nasdaq 100 indexes are up more
than 10% since the start of the year.
For tax purposes, some individual traders and fund managers may
want to offset gains by selling any losing positions they hold.
Even managers of nontaxable accounts often get rid of losing
positions ahead of the end of the year so they will not have to
report all of their individual mistakes to investors in annual
One way to take advantage of this behavior is to short stocks
that are likely to come under selling as the year draws to a close.
One stock that may see selling pressure increase is fashion
Fossil (Nasdaq: FOSL)
, which is best known for its watches.
Fossil has been a very successful company with revenue totaling
more than $2.7 billion in the past 12 months, andearnings per share
) growing at more than 31% a year in the past five years. ButEPS
growth is expected to fall to about 18% in the next five years, and
traders have been selling the stock since May when the company
announced that sales were slowing in Europe and Asia.
The chart above highlights two high-volume buying days that
occurred in the beginning of 2012 when buyers were adding Fossil to
their portfolios at prices of $100 to $140 a share. Some sold their
positions in May, but there are probably still some buyers with a
cost basiswell above the recent price levels near $80. Another
largevolume day took place in August, and those buyers are also now
On-balance volume (OBV ), an indicator that moves higher when
trading isbullish and falls when the bears are selling a stock, is
shown at the bottom of the chart. This indicator shows that buying
pressure was very strong early in the year, but there has not been
a lot of selling pressure since May.
The steadiness of OBV shows that many traders seem to be holding
their positions and expecting a rebound. The next chart shows that
they may be disappointed.
From the monthly and weekly perspectives, Fossil isbearish . The
monthly chart shows a recentstochastics sell signal, and this
signal has been accurate 57% of the time on trades lasting two
months. Because Fossil has been in a long-term uptrend, only 36% of
all two-month periods in the stock's trading history have been
down, so the number of correct trading signals given by the
stochastics is significant. The weekly chart shows a bearish
stochastic divergence in addition to a sell signal.
Fossil is a volatile stock, and options prices show that traders
are expecting a big move in the stock before the end of the year.
The stock is trading at about $80. January $80 puts are trading at
about $6. Option prices indicate that traders expect a price move
of at least 7.5% within the next 60 days, nearly three times the
volatility expected of the overall stock market. Options on
SPDR S&P 500 (
show that a move of about 2.8% is expected in theETF over the same
time frame, which is a rough guide as to how much market volatility
Based on the daily chart, aprice target of about $70, which is
the bottom of that August gap, is a reasonable price target. At
$70, an $80 put would be worth at least $10. Even though the
January $80 puts are expensive, traders could realize a potential
gain of more than 50% if the target is reached.
Action to Take -->
Buy Fossil Jan 80 Puts at $6.67 or less. Set stop-loss $1.90 below
the entry price. Set price target at $10 for a potential 50% gain
in two months.
This article originally appeared on TradingAuthority.com:
Tax-Selling Season Could Make You 50% on This
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