Blog : The Fiscal Cliff

by Peter Leeds on December 26th, 2012

We'll get to the Fiscal Cliff and how that will affect investing in penny stocks in a moment.  First, let's talk about tax-loss selling in penny stocks.

Nearing year end, many investors will sell losing positions so they can apply them to the current fiscal year for tax purposes.  Sometimes they do this to offset gains on other stocks, so they pay less total tax.

Since penny stocks are thinly traded, any year-end tax loss selling can push the shares down.  Once January rolls around, and those sellers no longer have an advantage by unloading any losing penny stocks, the shares often perform better.

This is partially the cause for the January effect, whereby penny stocks tend to do well in the early months or a new year.  We expect the same from penny stocks this new year too.

Penny stocks and the fiscal cliff:

Six days until the "fiscal cliff" is upon us.  While the media is doing a great job scaring everyone, there are three things to remember:

1.  even if no deal is made, and we fall off the fiscal cliff, it won't be as bad as the media is trying to make it seem.  The world won't end.  As a nation, we will just spend less.  It could create some pressure for the struggling economy, and certainly for many individuals who will be directly affected (mainly through job loss).  However, nothing is wrong with over-spending by a smaller amount. 

2.  politicians can at any time put off the decision, or move the fiscal cliff date many weeks or months later.  It is an arbitrary deadline, and can be adjusted easily.

3.  part of the negotiation process requires that we near the deadline date.  Neither side will give in early, or until they absolutely must.

With penny stocks, I often mention the concept of "buy the rumor, sell the fact."  This may play out with the whole fiscal cliff situation, as most of the fear will be baked into the pie leading up to the deadline.  If they come to a deal, or they don't and investors realize that we are still here, stocks (and penny stocks) could actually do very well leading into the first week of January.