In our last post we took at look at two forces that are lining up for a potential strong year end and start to 2011 (particularly in small/micro caps) and other beaten down shares.
One other area that may be ripe for a bounce is the closed-end muni funds. If you believe that the January Effect is due to tax-loss selling by retail investors combined with window dressing portfolios (and who wants to show they own muni funds after this big downleg?) then munis could be set up for a nice boune. The bond king has been even putting his own cash to work lately.
The website CEFConnect is a good resource for investors screening for closed-end funds.
Here is a nice white paper on the topic: Tax Loss Selling and the January Effect: Evidence From Municipal Bond Closed-End Funds
ABSTRACT
This paper provides direct evidence supporting the tax-loss selling hypothesis as an explanation of the January effect. Examining turn-of-the-year return and volume patterns for municipal bond closed-end funds, which are held mostly by tax-sensitive individual investors, we document a January effect for these funds, but not for their underlying assets. We provide evidence that this effect can be largely explained by tax-loss selling activities at the previous year-end. Moreover, we find that funds associated with brokerage firms display more tax-loss selling behavior, suggesting that tax counseling plays a role. This paper provides direct evidence supporting the tax-loss selling hypothesis as an explanation of the January effect. Examining turn-of-the-year return and volume patterns for municipal bond closed-end funds, which are held mostly by tax-sensitiveindividual investors, we document a January effect for these funds, but not for their underlying assets. We provide evidence that this effect can be largely explained bytax-loss selling activities at the previous year-end. Moreover, we find that funds associated with brokerage firms display more tax-loss selling behavior, suggesting that tax counseling plays a role
