In a recent “Ask the Expert” webinar, I ran through a quick illustration of an easy search to find lagging stocks that are likely to drop dramatically as the market moves back to support. Aggressive traders that use options trading information and are interested in stocks like these because even a small move in the market is likely to be amplified and could present a good profit opportunity.
Some of the characteristics we look for in a search like this would also be used by large institutional investors and hedge funds to create 130-30 strategies.
I received several questions about the search because we went through it fairly quickly, and I thought it would be useful to post it here for you to review. If you follow this link to www.finviz.com, you can see the exact criteria I used. This site is a very useful free searching tool that we recommend.
Here are a few details of what we would look for in a search like this. The criteria is pretty simple:
1. Poor Financial Performance
In this case I looked for negative ROE ratios and a very high debt-to-equity ratio. This should ramp up the firm’s sensitivity to bearish changes in the economy and market.
2. High Beta
This measures the relative volatility of the stock versus the market itself. If a stock has a beta of at least 2, then we would expect it to move more than twice as much as the market.
3. Shortable / Optionable / Liquid
It’s pretty easy to find penny stocks and the like that will make huge moves when the market is disrupted, but they may not be shortable or liquid enough to trade reliably.
Therefore, we recommend that you look for stocks with minimum volume levels, listed options, market cap over $300 million and availability to be shorted. This will help eliminate a lot of the junk.
Overall, this is a simple search and it will deliver a list of some real “dogs” that could be a good bearish bet as they are very likely to amplify the market’s move to the downside.
Shorting stocks or buying puts is not a strategy that is suitable for everyone but if you are interested in learning how to profit in a downtrend, this can be a great place to go to find some investment candidates.
This article is brought to you by LearningMarkets.com.
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