2 Stocks Worth Shorting

by Serge Berger | October 31, 2012 9:28 am

After three weeks of weak action in U.S. equities, we head into a new (shortened) week after being greeted by Hurricane Sandy[1], giving us yet another factor to take into account.

Who said this business was easy?

The S&P 500 lost roughly 3.5% during the past two weeks after failing to push to new 2012 highs in early October. Earnings will take the lion’s share of blame for the weak tape as of late, but from a technical point of view, the major indices are not yet broken beyond repair.

The S&P 500 has simple support around the 1,390-1,400 zone that would have to be breached before raising a more cautious flag. The Russell 2000 as well as the Nasdaq look the same, albeit somewhat weaker than the S&P 500.

Most cyclical sectors also are acting more in line with a consolidation phase rather than a blow-off top. Take the consumer discretionary sector, for example; the Consumer Discretionary Select Sector SPDR (NYSE:XLY[2]) remains in its latest up-swing that started in October 2011. A significant break of this simple up-trend might make investors more nervous.

Regardless of a broader picture that still supports somewhat higher equity prices into year-end, there are pockets of stocks worth playing on the short side. Earnings season has left clearly visible trend-reversal scars on a series of individual stocks.

Two names I spotted last week were Louisiana-Pacific (NYSE:LPX[3]) and Validus Holdings (NYSE:VR[4]). Both stocks had good runs this year (LPX is up around 115%, and VR is up 16.5% year-to-date), and both left at least near-term topping signals on their respective charts late last week. LPX and VR have clearly defined levels to lean against.


Click to Enlarge
Last Thursday,  Louisiana-Pacific tried breaking to new 2012 highs and out of a six-day consolidation phase. However, the attempt failed and left an outside bar with a lengthy tail on the daily candlestick chart. The setup should lead to at least some follow-through on the downside.

Stop: Last Thursday’s high at $16.73
Target: $14

One word of caution, however: Please note that LPX announces earnings before the market opens Nov. 6.

Validus Holdings

Click to Enlarge
Validus Holdings tumbled 3.6% last Friday after an earnings announcement and left an ugly outside day on the chart. A long, red outside day at the top of a trend most often leads to some follow-through selling.

Stop: Last Friday’s highs at $37.40
Target: $34.50

Serge Berger is the head trader and investment strategist for The Steady Trader[5]. Sign up for his free weekly newsletter[6].

  1. after being greeted by Hurricane Sandy: https://investorplace.com/2012/10/when-the-market-reopens-what-to-expect-after-hurricane-sandy/
  2. XLY: http://studio-5.financialcontent.com/investplace/quote?Symbol=XLY
  3. LPX: http://studio-5.financialcontent.com/investplace/quote?Symbol=LPX
  4. VR: http://studio-5.financialcontent.com/investplace/quote?Symbol=VR
  5. The Steady Trader: http://thesteadytrader.com/
  6. free weekly newsletter: http://thesteadytrader.com/archive/

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