Tax-loss harvesting hurt stocks in October. But traders can use this to their advantage.

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Joseph Adinolfi is a markets reporter at MarketWatch.

Tax-advantaged selling heaped more pressure on U.S. stocks last week, according to data from Bank of America. But it could also create opportunities for investors willing to be a little patient.

Data from BofA’s sales desk suggests that tax-related selling by the bank’s institutional clients, mostly mutual funds, is likely peaking again this month, as it often does in October, as mutual funds that face an earlier tax deadline try to make red ink work to their advantage. The table below measures historical performance of these companies compared with the S&P 500. What the team found appears pretty compelling: On average, this group beats the large-cap index by 1.9 percentage points between the beginning of November and end of January.

There’s no shortage of candidates this year, given that many stocks are sitting on sizable losses year-to-date despite the advance in the S&P 500 and Nasdaq Composite. Gains for these indexes have been largely driven by a handful of megacap technology companies, as MarketWatch has previously reported, while the vast majority of S&P 500 stocks are sitting on losses year-to-date.

 

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