It’s that time of the year again on Wall Street, an annual period during which nimble investors have a good shot at turning losing stocks into winning ones in just a few short months. What’s more, in the process you can make a fast 10% to 20% on your money, perhaps even more.

In brief, it’s the proven art of capitalizing on tax-loss candidates — those losing stocks investors traditionally unload at the end of the year and use as tax losses to offset their capital gains.

Already beaten up, these underperforming stocks are bloodied even more from the last minute wave of the taxloss selling, often making them prime rebound candidates once such selling has run its course, presuming, of course, you pick right.

The practice of tax-loss selling has been identified as increasingly prevalent following the Tax Reform Act of 1986, which mandated that October 31 was the cut-off date for mutual funds to realize capital gains and losses.

In this context, Merrill Lynch has come up with what it regards as a winning tax-loss candidate strategy (TLC in this column doesn’t stand for tender loving care … ) that’s based on picking stocks that are all buy-rated by the firm, sport the lowest year-to-date returns and show flat or declining institutional ownership in October.

So far, at least, there’s no debating Merrill on the success of its strategy. The performance figures tell the story. Merrill strategist Savita Subramanian notes that the strategy has outperformed the market in four of the past five years by an average 9.6%. Last year, for example, Merrill’s TLC stock picks, from November 1 to January 31 of the following year, turned in an impressive average gain of 13.9%, or almost 10 percentage points higher than the S &P 500’s average return of 4.3% during the same period.

Or, as best summed up by one Merrill trader: “It’s how to successfully turn trash into cash.”

Interestingly, Merrill found that if its basket of TLC stocks, usually nine, were to be held beyond January, it diminished performance. In other words, it’s a short-lived threemonth strategy and if you want to play, you get out fast when the trading period is over.

To come up with a current basket of TLC stocks, Merrill screened the S &P 500 for its 25 worst year-to-date performers through October 23. The 25 are all buy-rated by Merrill, with the most (11 or 44%) in the technology sector. Though October 23 is behind us, the TLC strategy is still rated quite viable since January 31 of 2007 is still a ways off, suggesting the bulk of the money from the potential rebound in the stocks has yet to be made.

More often than not, some traders tell me, the biggest “rebounders” can usually be found among the biggest losers, which are traditionally whacked with the heaviest tax-loss selling pressure.

Here are the dozen biggest 2006 losers on the Merrill list, with their percentage losses through October 23 in parentheses: St. Jude Medical (31.6%), Centex Corp. (28.9%), eBay (26.5%), JabilCircuit (21.8%), Maxim Integrated (21.6%), Juniper Networks (21%), UnitedHealth Group (18.5%), PMCSierra (16.8%), Autodesk (16.3%), Tyson Foods (15.1%), Intel %14%), and QUALCOMM (11.6%).

The remaining 13 companies on the Merrill list, with 2006 declines so far ranging from 5% to 11.2%, are Affiliated Computer, Rowan Companies, Coventry Health Care, MGIC investment Corp., Home Depot, EOG Resources, Carnival Corp., Hershey, Lowe’s Cos., Capital One Financial, VeriSign, National Semiconductor, and Ingersoll-Rand.

The bottom line: It’s still not too late to turn trash into cash.

***

Danger signs: Speaking of Merrill Lynch, its technical analyst, Mary Ann Bartels, is flashing red lights. With price momentum indicators overbought, sentiment readings deteriorating, and fastmoney short positions being covered, the equity market is in a vulnerable position going forward into the winter months, she says.

Noting that professional and individual investor sentiment survey readings are turning more bullish and the S &P 500 futures have never before seen such a crowded net long position — both of which are normally sound contrary indicators — Ms. Bartels says a “topping process” appears to be under way. She believes the magnitude of the correction will be determined by who sells.

If this becomes just another hedge fund unwind trade, the correction could be minor as in the case of May/June, between 8% and 10% from the market high, she believes.

On the other hand, she points out, if long-only institutions become sellers along with the hedge funds, then the correction could be deeper, near 15% to 20%.

dandordan@aol.com