There has been much debate lately into whether or not we are going into a recession in the coming year. Investors and economists are monitoring data and are trying to interpret what 2016 might bring for the economy. The picture isn’t clear at the moment as we continue to see a mixed bag of bullish and bearish data.
I’ll leave the forecasting and the guessing to the economists, but as a trader I see a tremendous opportunity to sell stocks and start shorting the underperformers.
The recent rally in the markets should be put in perspective so we can make the right decisions on whether to buy or sell stocks.
As of Friday, the S&P 500 has rallied over 10% from its February 11th low just over 1800. This is the kind of move that typically doesn’t happen in a year, much less three weeks. If an investor bought on the dip, they have an opportunity to take a year’s worth of gains in under a month, or risk giving it all back.
If an investor did nothing and held through the panic, they are almost back to even for the year. They now must choose to hold, risking another 10% drawdown, or go to cash, putting themselves in a great position to take advantage of lower prices.
This weekend I spent time reviewing charts of the Zacks Rank #5 (Strong Sell) list. I was looking for stocks that had an obvious downtrend and poor fundamentals. I also wanted to see a bounce over the last three weeks so I could take an advantage of the euphoric and irrational rise in price. There is a chance for current investors to save money by selling now before prices fall and there is opportunity for short sellers to profit when prices do fall.
I feel that I have potential to be compensated in two ways:
1.) Technical- The stocks I’m looking at are at technical resistance and a pullback has a high probability.
2.) Fundamental- Poor fundamentals and falling estimate revisions will be reflected in future stock price.
There are plenty of stocks out there right now that should be sold, but I wanted to highlight the following four:
Stocks to Sell Now: Exxon Mobil Corporation (XOM)
Exxon Mobil (XOM) is a Zacks Rank #5 (Strong Sell) that is a popular oil and gas company. Exxon’s principal business is energy, involving exploration for, and production of, crude oil and natural gas, manufacturing of petroleum products and transportation and sale of crude oil, natural gas and petroleum products. Exxon also is a manufacturer of various chemicals and plastics and specialty products.
The company has a $340 billion market cap with a forward PE of 32 and pays a 3.55% dividend. The stock sports Zacks Style Scores of “F” in Growth and “D” in both Value and Momentum. The company is ranked 206 out of 265 (Bottom 22%) in the Zacks Industry Rank.
Over the last 90 days, Exxon has seen estimates revised significantly lower. For fiscal year 2016, estimates have come down from $4.07 to $2.42, a fall of over 40%. For fiscal year 2017, estimates have fallen 12%, from $5.04 to $4.43.
The chart below shows us the beginning of what looks to be a converging triangle in which price sits at the top of the bearish trend line. A break up or down of this triangle will most likely be the short term direction of price. Giving the market’s recent rally and probability of pullback, a short position here would set up a nice risk reward. October’s high of $87.44 would be my stop, with expectations that I could see the bullish trend line tested at 75. If that level broke it would be likely that last year’s lows would be tested again.
Stocks to Sell Now: Richie Bros. Auctioneers (RBA)
Ritchie Bros. Auctioneers (RBA) is a Zacks Rank #5 (Strong Sell) that conducts unreserved public auctions every year at locations throughout North and Central America, Europe, Asia, Australia, Africa and the Middle East. The company is recognized for their innovative auction methods, attention to detail and commitment to the unreserved auction. Unreserved auctions are when there are no minimum bids or reserve prices and items are sold to the highest bidder, regardless of price.
The company has a $2.5 billion market cap with a forward PE of 21 and pays a 2.60% dividend. The stock sports Zacks Style Scores of “F” in Value and “D” in momentum. The company is ranked 250 out of 265 (Bottom 6%) in the Zacks Industry Rank.
Over the last 90 days, the company has seen estimates revised lower. For fiscal year 2016, estimates have come down from $1.27 to $1.17, a fall of over 7%. For fiscal year 2017, estimates have fallen 10%, from $1.44 to $1.30.
The chart below shows a downward channel that formed in the middle of last year. Being at the top of that channel investors should take profits and shorts should start positions at current levels.
Stocks to Sell Now: Olympic Steel, Inc. (ZEUS)
Olympic Steel (ZEUS) is a Zacks Rank #5 (Strong Sell) that is a specialized steel service center that processes and distributes flat- rolled carbon, stainless and tubular steel products.
The company has a $150 million market cap with a forward PE of 39 and pays a 0.59% dividend. The stock sports a Zacks Style Scores of “D” in Momentum. The company is ranked 236 out of 265 (Bottom 11%) in the Zacks Industry Rank.
Over the last 90 days, the company has seen estimates revised lower. For fiscal year 2016, estimates have come down from 75 cents per share to 35 cents per share, a fall of over 53%. For fiscal year 2017, estimates have fallen 38%, from $1.21 to 74 cents per share.
The chart below shows the stock has recently come up to a bearish trend line after making a 75% move form 2016 lows. Current prices should be sold by both longs and short sellers for a continuation of the two year trend.
Stocks to Sell Now: Fomento Economico Mexicano SAB (FMX)
Fomento Económico Mexicano (FMX) is a Zacks Rank #5 (Strong Sell) that is Latin America’s largest beverage company. FMX exports to the United States, Canada, and select countries in Europe, Asia, and Latin America.
The company has a $34 billion market cap with a forward PE of 28 and pays a 1.44% dividend. The stock sports Zacks Style Scores of “F” in Value and “D” in both Growth and Momentum. The company is ranked 181 out of 265 (Bottom 32%) in the Zacks Industry Rank.
Over the last 90 days, the company has seen estimates revised lower. For fiscal year 2016, estimates have come down from $3.68 to $3.42, a fall of over 7%. For fiscal year 2017, estimates have fallen 8%, from $4.17 to $3.86.
The chart below shows the stock has recently come up to the top of a range between $80 and $100. This presents investors with a chance to bail on the stock at the top of its range and even short the stock with a potential 20% return if it comes back down to test $80.
Stocks to Sell in Summary
The recent rally has crushed the short sellers that were stubborn and didn’t take profits in early February. Now is the time for investors to sell weak companies and build cash for another pullback. New short sellers can also take advantage of the possibility of a pullback by initiating new positions.
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