Does it make sense to sell in this situation?
If you have the holding capacity, I would definitely recoomend you not sell any of my mutual funds, even to take advantage of the tax losses as I suspect that the stimulus package that is being considered by the new US administration is going to be gigantic! The stock market will rally with the new incoming administration to some extent!
Is this essentially a zero sum game I am playing?
The question is really not relevent and I don't believe it is a zero sum game.
I generally think that Stock market investing is only for experts, but if you are a long term investor with a long horizon, than dollar cost averaging is a sure bet, that will tend to result in gains on average of about 10-12% compounded over 10 years.. Don't sell to make a short term gain, or to take huge tax losses, as when you buy back this funds after 12/31/08 you could be facing with a new stock market rally with considerable higher prices.
Of course, if you have to sell due to your personal circumstances than you have no choice but to sell and realize the tax losses and use $3,000 of those losses for the current year and carryover the balance of the losses over the future years.