According to the 2009 edition of the Stock Trader’s Almanac, December has historically been the second best-performing month of the year, with an average gain of 1.7% in both the Dow Jones Industrial Average and the S&P 500 Index since 1950.  It’s also the third-best performing month for the Nasdaq for that same period. Personally, I wouldn’t change a dime of my own investment holdings based on this kind of analysis, but I think it’s interesting.

Still, even though the month has an admirable historical record, the end of the calendar year can put some interesting wrinkles in the December performance of some stocks.  Here are a couple.

Window Dressing

My wife and I spent most of the Saturday following Thanksgiving walking around Manhattan looking at store windows.  (All we did was look, but there were plenty of shopping bags in evidence, too.)  New York has lots of great store windows and the holiday season gives window dressers a chance to shine.

But the windows also got me to thinking of the way some pension fund and mutual fund managers will sell losers and buy chunks of winning stocks in order to have them in the portfolio at the end of the year.  This allows them to showcase some great names in their annual reports, even if they only owned them for a week or two at the end of the year.

Institutional investors may also sell all or part of some of their winners to book profits and bring their holdings of stocks that have appreciated back into compliance with portfolio guidelines.

Tax Selling

The end of the year brings both profit taking in big winners but also tax selling of some losers.  The desire to book a loss to offset gains can push some depressed stocks even lower.

Bottom Feeding

While window dressing and tax selling can produce unexplained movement in some stocks, they can also create opportunities for value-minded investors.  For people with a taste for low P/E ratios, a declining price in a favored stock is like a holiday gift card.

There isn’t much to be done about any of these December phenomena except to remind yourself that unexplained movements in stocks of interest are par for the course at year-end.  The important thing, as always, is to watch your charts and keep your sell disciplines sharp.  And if you’re a bargain hunter, keep an eye out for good stocks at advantageous buy points.