After narrowly bucking the trend of
poor performance during the week after June option expiration week, by a little more than 10 points, DJIA and the rest of the market is stumbling early in the final week of Q2 and the first half. Tech and small-cap were the biggest decliners today as the IMF cut its growth forecast for the U.S. from 2.3% to 2.1% for 2017 and trimmed its 2018 outlook even more, from 2.5% to 2.1%. Debt, labor force participation, a 13.5% poverty rate and the increasing likelihood that meaningful policy changes would not materialize were among some of the main drivers that led to this downtrodden outlook.
If the new administration, the majority party, fails to deliver on promises and growth does not accelerate, then the market could be well ahead of itself. This does not mean a recession and/or bear market is inevitable, it just means a near-term pullback or correction is more likely. It has also been 502 calendar days since the last S&P 500 correction of 10% or more which nearly equals the average duration between corrections since 1950 of 515 days.
When? It could be soon. July is generally a decent month in most years and has a solid history in post-election years, but afterwards, August and September have about nearly the opposite record. Furthermore, trader and investor patience will be even thinner two to three months from now if little or no progress has been made in D.C. Factor in the looming budget battle and impending debt ceiling within the context of the current level of Federal government dysfunction and many of the necessary ingredients are present for a market pullback.
Short Stock Basket
This basket of 14 possible stocks to short spans the three market cap ranges in the Almanac Investor Stock Portfolio. There are two Small-Cap stocks (less than $1 billion), eight Mid-Cap stocks (greater than $1 billion but less than $5 billion) and four Large-Cap stocks (greater than $5 billion in value). Our screening process involved an in-depth review of fundamentals, such as revenues and earnings, valuation metrics like price-to-earnings and price-to-sales ratios, each stock’s technical situation as well as price and daily trading volume. Seasonally weak sectors, like materials, transports and cyclicals were also given extra attention and produced a few of the stocks in the basket.
The broad criteria for inclusion on this list relied primarily on revenues and earnings (past and future estimates). Generally, stocks that are exhibiting decelerating, flat or negative earnings ranked high on our list of short candidates. Out of this trimmed list, stocks with elevated P/E and/or P/S ratios were retained. Finally share price and volume were considered. From a list of several thousand stocks, these 14 remained. A few of these stocks, like Tesla Inc. (TSLA) have solid revenue growth, but profits remain elusive and cash is quickly being consumed. There are worse stocks out there, but many of them had already fallen a substantial distance. Whereas, this basket still appears to offer plenty of downside potential in coming months. Some are trading near 52-week lows while others maybe just a few percentage points off of 52-week highs.
Remain patient as the first half of July is historically bullish, but afterwards the worst-two-consecutive-month span, August through September, begins. Like past short trade ideas, there are two possible prices to consider establishing a short position at. The first is labeled “Short @ Resistance” in the table below. Should a stock rally toward this price then stall and lose momentum a short trade can be considered. Look for corresponding weakness by MACD, Stochastic and relative strength indicators to confirm. The second price to consider shorting the stock is listed in “Short on breakdown below”. This is the stock’s current projected support level. If the stock breaks support a short trade can also be considered. Regardless of short trade entry price, the suggested stop loss is the same initially. All 14 short stock ideas will be tracked in the Almanac Investor Stock Portfolio.
Disclosure Note: At press time, officers of the Hirsch Organization, or accounts they control did not hold any positions in the stocks mentioned, but may buy or sell at any time.