Historical Stock Market Trends: Window Dressing Primer

Winning is public and losing is private. That’s one of the stock market trends that you can bank on. If you don’t believe it, then ask any mutual fund manager about window dressing, one of the most pervasive historical stock market trends out there.

 

At the end of each quarterly reporting period, many fund managers sell losers in their portfolio and replace them with winners from the stock market. When the financial statements come out, the fund’s portfolio is filled with high performing stocks and all the losers are out. The fund’s holdings look perfect. That’s window dressing.

 

For the competent trader, capitalizing on the fund manager’s tendency towards window dressing can be a potentially lucrative strategy. Here are some simple techniques to help identify which funds may be making moves, as well as which stocks to observe for window dressing:

 

  • Read the prospectus and holdings more deeply: Just knowing that losing stocks will be buried in sells just before the reporting deadline gives one pause. Don’t simply glance at the holdings and the percentage of total for each holding, look at the turnover rate and the total return. Does a mutual fund post a loss or below-market return but list nothing but high-performing stocks in it’s portfolio? If yes, then you’re looking at window dressing.
  • Look for winners to spike: Follow high-flying, high-profile stocks. Watch the stock market trends. After a while, you’ll see that stocks outperforming the market spike in price just before reporting deadlines. You may want to use a strategy that time the buys of these stocks just before window dressing pushes the prices up, and then look to exit before the correction.
  • Look for losers to fall: Just like with the high performing stocks, under performing stocks will fall in price nearing reporting deadlines as window dressing pushes prices down. A strategy that takes advantage on the short side can assist you in timing your shorts with the reporting dates. After the quarter end reporting dates, look for opportunities to close out your shorts for a profit if applicable. Even though these stocks are poorly performing, more than likely the end-of-period sell pushed their prices below rational levels, so their prices may come up slightly as funds reinvest.

 

Of course, there are some caveats. High performing stocks may already be over valued, so when the time for a fund’s window dressing to kick it, the price of the stock may not move upward all that much. Also, as more and more investors have access to detailed information of stock market trends, first movers will bid up the price of possible buy candidates.

 

Think of it this way. For example, suppose everyone knows that Friday is the last day for fund managers to buy and sell before the reporting deadline. Savvy, aggressive traders buy on Thursday. Yet, if too many buy on Thursday, then the price is bid up and the advantage is gone. The trader then has to adjust and buy on Wednesday until Wednesday becomes the common buy day, and so on.  This is a typical example of how historical stock market trends can lose their potency.

 

Still, the opportunities are out there. Window dressing is one of the historical stock market trends that is not going away anytime soon. Strong stocks will continue to spike every three months and weak stocks will fall. Analyzing and exploiting these opportunities with good timing can give you a distinct advantage in your trading

 

Finally, no matter how well certain historical stock market trends have performed over the years, there is nothing that I have found to be 100% accurate and easy. There is plenty of super guru hype out there about how well something has done in the past, but if there wasn’t real risk, there wouldn’t be the potential for reward. Always practice proper money management and use stop losses, otherwise you put your business in jeopardy.

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