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In a year when the wider stock market has done well, investors are keen to offset taxes on their winning stocks with losses on their losers

BRENDAN MCDERMID/Reuters

Mark Hulbert at MarketWatch relays an intriguing short-term investment strategy that sounds particularly appropriate in today's market: Buy the biggest losers.

In a year when the wider stock market has done well, investors are keen to offset taxes on their winning stocks with losses on their losers – and this selling usually occurs in the final two months of the year, driving prices even lower but setting up a potential rebound in January.

Last year, Hewlett-Packard Co. was a standout example. By mid-November, 2012, the tech stock had fallen more than 50 per cent during the year. It then rebounded 47 per cent by the end of January, 2013.

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"The performance of this year-end bounce strategy isn't always that impressive," Mr. Hulbert writes. "It tends to be strongest in years like 2012 when the major market averages have posted the biggest gains going into the last couple of months of the year, since in those years investors will have the greatest amount of gains that they want to offset."

"When the market is posting a year-to-date loss going into the end-of-year period, by contrast, investors will have fewer gains that need to be offset by selling losers."

This year is looking good for the strategy, especially in the case of U.S. stocks. The S&P 500 has risen about 24 per cent in 2013, putting it on track for its best annual gain since 2003. And the gains have been broad, affecting about 90 per cent of stocks in the index.

For candidates that fit the strategy, Mr. Hulbert looked at stocks within the broader S&P 1500 that have fallen at least 20 per cent this year and are recommended by at least one of the advisers he tracks who have outperformed the market over the past 15 years. He found: American Eagle Outfitters Inc., Higher One Holdings Inc., Intuitive Surgical Inc., Liquidity Services Inc., MDC Holdings Inc., Newmont Mining Corp., Procera Networks Inc., Teradata Corp. and Titan International Inc.

He didn't mention Canadian stocks. At first glance, the S&P/TSX composite index doesn't look like a great place to look for candidates: The index is up just 7.4 per cent in 2013 (lagging most of the world), with 40 per cent of the index under water. With so many losing stocks to choose from, the strategy could be diluted.

However, the index has done considerably better in recent months: It is up nearly 13 per cent since the end of June. And many of the losing stocks are confined to the materials sector, where mining stocks have been pummelled. A broad bet on rebounding materials in January fits the strategy. Otherwise, there are also non-mining stocks in the S&P/TSX composite index that have hit hard times in 2013. They include Dundee REIT, Wi-Lan Inc., Reitmans (Canada) Ltd., Atlantic Power Corp. – oh, and BlackBerry Ltd.

Yes, it is a strategy that requires a considerable level of bravery from those who employ it.

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