With the stock market breaking records daily, this year's December effect has not presented itself yet, and market observers doubt the January effect will be as marked as in past years - if it shows up at all.
So far, taxable investors are breaking with the pattern of selling stock in December to offset their capital gains. With mutual funds having cleaned up their portfolios already by the end of October - in order to present their year-end results to shareholders - that leaves the field to the individual investors, who are not behaving as usual this year.
"The likelihood this year is relatively remote that you will see a great deal of tax-loss selling. You've got a market that's already up 33% to 32%, so there aren't a lot of losses to begin with," said Gene Grandone, director of investment counseling for Northern Investment Counselors, Chicago.
Aggressive investors make decisions using taxes as a secondary criterion, he said. They are more sophisticated and more inclined to use protective strategies such as shorting against the box - selling short a stock they already own - and collar strategies to defer the tax impact until next year, he said.
Other managers say investors also are holding on to stock and putting off taking profits until next year in the expectation that Congress will reach agreement on a cut in the capital gains tax.
"It's just not as cut and dried as it used to be. Years ago, tax-loss selling was a foregone conclusion at the end of the year. Things are not as clear cut now," Mr. Grandone said.
John W. Church, chief investment officer of Glenmede Trust Co., Philadelphia, said shorting against the box is gaining wide acceptance as a way to sell the stock without paying the tax, and it can defer gains indefinitely.
"I have this nagging feeling that there are a lot of people who are waiting until next year to sell because they think the taxes will be lower," he said.
That creates a troubling possibility that the market will get driven down in waves of profit-taking once the capital gains tax passes, said Tony Hitschler, chief investment officer of Brandywine Asset Management Co., Wilmington, Del. There won't be an exodus, but there will be a change in demand as investors cash in, he said.
His recommendation? "Don't be a pig," be among the first to sell once the tax cut passes, rather than hold out waiting to capture more returns, he said.
Meanwhile, with less tax-loss selling in December, there is also a lesser likelihood of the infamous "dead cat bounce" where even the worst stocks bounce back in January, as investors buy back what they sold the month before.
That January effect tends to affect small-cap stocks the most, said Derek Sasveld, a consultant at Ibbotson Associates, Chicago. Smaller issues tend to be more volatile and have lower price/equity ratios, making them chief candidates for tax-loss selling in December, and conversely, more popular for buying in January, he said.
For those investors seeking to follow the traditional pattern of selling losing stocks to offset their profits, there are few places to turn.
According to Standard & Poor's Corp., 66 issues among the stocks in the S&P 500 index showed a loss so far in 1995.
Without factoring in dividends or reinvestments, the cost of buying one share each of the 66 companies dropped from $1,853 at the beginning of year to $1,623, a 12.4% loss on those 66 issues. The total market value of the 66 companies' shares was $257 billion at the start of the year, and it stands at $229 billion currently, a 10.9% loss; the average loss for those 66 issues was 14.8%.
"You'd be hard-pressed to find some losses in your portfolio," said John W. Ballen, chief equity officer of Massachusetts Financial Services, Boston.
Gaming is perhaps the only sector in the stock market that showed losses on an absolute basis, he said.
Most managers said zeroing in on the retail segment would produce most of the likely candidates for tax selloffs. Many pointed to Kmart Corp., which is reportedly considering a Chapter 11 bankruptcy filing, to be a prime candidate.
Brandywine's Mr. Hitschler said other stocks that might be ripe for selling include Advanced Micro Devices Inc., Inland Steel Industries Inc., Bethlehem Steel Corp. and Navistar International Corp.