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I think the idea is to buy low market-cap thinly traded stocks at a time when tax-loss harvesting adds to selling pressure. To me it's sort of like fishing, put in some limit buys at very conservative prices and see what fills. Then wait for the wash sale rule to time out and hopefully add a bump to whatever mean reversion takes place at the new year. I remember this scheme seemed to work well during the bubble years, but it's been less productive recently. Over the past couple of years all I found were some fairly good deals on small banks. Due diligence is an absolute must because this corner of the market is rife with adverse selection; if you don't know what to look for in a financial statement, this is probably not a game for you. One thing I've found to help narrow the field-- I tend to follow DFA (Dimensional) around.
Thought about it some more and explored the options (literally). Seems puts & calls are too expensive to execute on this. There basically has to be a 4% difference or more between small cap and large cap before I turn a profit.
Instead I'll just expand and continue my magic formula experiment. I am buying small caps there anyway.
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