There is a term on Wall Street called “Window Dressing”. It is described as the tendency of portfolio managers to sell their losers and add to their winners to make their portfolios look better for the performance reports to shareholders at quarter/year-end. Many academic studies have been written about the effect. Once the phenomena became popularized it became a self-fulfilling prophecy. So, as traders, we might look to take advantage of the effect both before and after the quarter/year-end. We do this by examining trade flows as a quarter or as the yearend approaches. Many deep value propositions occur when the “baby is thrown out with the bathwater”. Conversely, many "momentum-plays" revert to the mean after the accounting/reporting period closes, so a sharp eye on stocks that go into a climax run can provide a selling opportunity. As traders, we can view the overall market of stocks in the fashion of a bell curve over a specified time. In a reversion to the mean strategy, one looks to trade in the best and worst performers, looking to buy fundamentally cheap stocks and sell fundamentally overpriced momentum stocks going into and following the quarter and/or year-end. It must be stated that this can be a rewarding strategy, but also one that can be hazardous, so always reassess positions and use stop-loss orders to protect capital. We will note that October 31st is the end of the fiscal year for many mutual funds, so going into the end of the month here in October is an important time period. Happy hunting!
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