The Nasdaq-100 is on track to book a 40% annual return after a tumultuous first quarter, when the tech-heavy index dropped more than 30% in five weeks. Perfect timing into and out of top-tier players would have netted an 80%-plus return and a whole lot more for the red-hot momentum plays that supercharged the summer trading environment. Even so, this year's ticker tape has been a hot potato, fooling traders leaning too far in either direction.
Sadly, many index components didn't participate in the advance and are slumping near 52-week lows as we head into the last six weeks of the trading year. Those looking for opportune profits during this period may wish to brush up on tax-selling season tendencies and sell short a basket of the weakest components. These can be easily identified by sorting the component list according to their relative positioning above or below their 200-day exponential moving averages (EMAs).
It's surprising that four biotech stocks are stuck at the bottom of the list, given all the excitement and speculation generated by the hunt for a COVID-19 vaccine. BioMarin Pharmaceuticals Inc. (BMRN) is dead last, followed by Vertex Pharmaceuticals Incorporated (VRTX), Biogen Inc. (BIIB), and Gilead Sciences, Inc. (GILD). If you recall, President Trump touted Gilead's remdesivir after his illness, but it wasn't enough to curtail a 30%-plus haircut off March's two-year high.
Tax selling refers to a type of sale in which an investor sells an asset with a capital loss in order to lower or eliminate the capital gain realized by other investments, for income tax purposes. Tax selling allows the investor to avoid paying capital gains tax on recently sold or appreciated assets.
BioMarin Pharmaceuticals broke out in May and posted strong gains into July, topping out at a five-year high in the low $130s. It pulled back into August and plummeted more than 40 points in one day after the Food and Drug Administration (FDA) rejected a key drug application. There has been little bottom fishing in the past three months while price action has failed to remount the broken .786 Fibonacci rally retracement. This is a classic set-up for a 100% retracement into 2016 support in the low $60s.
Dow component Intel is the weakest tech stock on the list, disappointing investors with a 24% year-to-date loss. However, selling short into year end could backfire because weekly and monthly relative strength readings have dropped into extremely oversold levels at the same time the decline has hit a trendline going back to October 2018. As a result, this chart looks more like a great set-up for a January Effect play than a timely short sale.
Next on the list, Citrix Systems is still dazed from the runaway train that slammed its meeting software to the pavement. Fewer folks knew about Zoom Video Communications, Inc. (ZM) when the year started, at the same time that businesses worldwide routinely used Citrix meeting applications. The company lost its commanding market position, perhaps permanently, when the world adopted Zoom at an astounding rate in the first quarter.
The stock participated in the COVID-19 beneficiary rally into July's all-time high at $173.56 and collapsed, failing a breakout and dropping 36% into early November. Technical readings have eased off oversold levels since that time, with the stock now trading about six points below 50-day EMA resistance at $126. A buying spike into that level could trigger a rapid reversal that translates into short sale profits.
The January Effect is a perceived seasonal increase in stock prices during the month of January. Analysts generally attribute this rally to an increase in buying, which follows the drop in price that typically happens in December when investors, engaging in tax-loss harvesting to offset realized capital gains, prompt a selloff.
The Bottom Line
A basket of the Nasdaq-100's weakest components could offer short sale profits into year end.
Disclosure: The author held no long or short positions in the aforementioned securities at the time of publication.