2016's Window-Dressing Stocks: Portfolio Managers Likely To Add And Eliminate These Issues

As the market closes out the final week of an eventful year, fund managers have one last chance to modify their holdings ahead of year-end investor updates. Sometimes, these fund managers try to paint a slightly rosier picture of their annual performance by tweaking their holdings just prior to the year’s end. The practice of buying top performers and dumping laggards in the final days of the year is known as window dressing.

Why Window Dress?

According to Schaeffer’s Investment Research, window dressing can create tradeable opportunities in some of the best- and worst-performing stocks in the market at the end of the year.

Schaeffer's looked at the top optionable stocks with at least 5,000 in open interest on the front three-month series to try to identify window dressing effects.

The firm found that the 100 stocks with the highest returns in the first 11 months of the year tend to outperform in December, while the 100 stocks with the lowest returns tend to underperform in the final month.

For traders looking to make window-dressing trades this week, Schaeffer's also identified another interesting trend. Window dressing effects seem to be more pronounced in non-S&P 500 stocks.

“It’s possible the lack of clear window dressing effects is because SPX stocks tend to be widely held by funds regardless of performance,” the firm speculates.

Names To Focus On As The Year Ends

The best candidates for window dressing trades this week include the top 2016 performers Teck Resources Ltd (USA) TECK, Cliffs Natural Resources Inc CLF and AK Steel Holding Corporation AKS.

Market laggards that could come under additional window dressing selling pressure include Valeant Pharmaceuticals Intl Inc VRX, Endo International plc – Ordinary Shares ENDP and NewLink Genetics Corp NLNK.