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How to find shorts

16


If all the circumstances are favorable, shorting stock works sometimes in market . Per trade profits on short side tend to be significantly smaller than on long side trades. However having a variety of shorting techniques in your repertoire of trading methods is not a bad idea for active traders.

While there is no shortage of bearish opinion, there are few methodical ways to find short. You still have to find a stock to short if you read for 3 years in row that American economy is going to dogs or market is going to go down by 50%.

So here is a simple system that may make even the perma bears profitable on short side in most market circumstances. As usual it is for the users of Telechart.

  1. Set up a Easyscan with following conditions:
  2. Watchlist= All stocks
  3. Price growth rate 1 year= rank 75 to 100
  4. Price percent change 26- weeks= rank 1 to 25
  5. Volume 1 day= value 1000 to max
  6. This will give you a list of candidates which offer good short opportunity.
  7. Sort this list by price and take top 30 stocks and on them use following scan to time entry.
  8. ( 100 * (C - C1) / C1) <= ( - 4) AND V >= 1000 AND V > V1
  9. Stop at high of entry day.
  10. Move stop to protect 10% profit, after that keep moving stop every 2% plus move to protect profits. Profits on short side are ephemeral, a counter trend rally can wipe them out in few days so taking smaller profits and playing this more as swing system will gives better results. Because you are looking at only 30 stocks, you can anticipate short entries.
The basic logic behind this is to short a stock which was formerly a price leader and which had been lagging market in last six month. Stocks on short side go from high price to low price, hence take top 30 ranked by price.

When I find suitable name I will rename this and add to the sidebar.

Later: More shorting techniques ........




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16 comments:

internet said...

With so many more ETFs now (in variety and liquidity) than last real bear market, it may be just easier to ride the ETFs down if the market is reflecting higher recession probabilities.

PDP, PIV, RTH, XHB, IYR, SMH, IBB, etc, etc.

Pradeep Bonde said...

ETF's are just vehicles. A better stock selection strategy will any day beat ETF.

internet said...

It'll also be interesting to see how these absolute returns/low beta strategies hold up...RYMSX, DBV.

If the carry trade (DBV) too breaks down, it'll be a serious indicator of increased systemic risk....then good ole BIL or SHY would probably be best bet.....and I forgot about QID/TWM/SDS/etc.....those would have been helpful c. 2000-2002.

Cheers.

Pradeep Bonde said...

Traders have not thought through the other side of using ETFs. Better stock picking is always key. When you use ETF you sub optimise.

http://www.marketwatch.com/news/story/story.aspx?guid={FB68129E-B52F-4634-9570-575869B4126F}&print=true&dist=printTop
But there are also problems with managers using ETFs to hedge their equity portfolios, Weinhoffer said.
ETFs have more moving parts than a single stock, he explained. If a hedge-fund manager wants to short a couple of hard-to-borrow biotech stocks, for example, the manager could more easily bet against an ETF covering that industry.
But when managers do that, they're not just shorting the two stocks they want to target; they're also betting against several other companies that they may not know as much about, Weinhoffer said. "There's extra risk there."
Bernstein noted that equity hedge funds typically go long stocks with high betas (if the market goes up or down 1%, these stocks will go up or down 1.5% or 2%, for example).
If funds are also short an ETF, these usually have a much lower beta (they move more in step with the market). So, if the market goes down 1%, the ETF position may rise by 1%, but the long positions could go down by 1.5% or 2%, he explained.
Increased shorting of ETFs also poses a dilemma for funds of hedge funds, which allocate money to a range of different outside managers, Bernstein said.
These investors like to invest with managers who focus on different strategies and hold different securities. That diversification cuts the risk of big losses. But if a lot of managers are shorting ETFs, returns and losses may be more correlated than investors realize, Bernstein explained.
ETFs are also indexes, and so, by definition, they provide so-called beta -- that is, the return generated by the market. Hedge-fund managers are in the business of creating alpha and outpacing the market benchmarks. So if they build short positions with ETFs, that part of their strategy will track whatever portion of the market they're betting against. That could end up looking more like beta than alpha.
Investors may be better off investing with a mutual-fund manager who is a great stock picker, then shorting ETFs themselves, Glen Dailey, head of prime brokerage at Jefferies Group, said, adding that this strategy would incur fewer fees.

bowler2005 said...

Hi Pradeep,
You said, "The basic logic behind this is to short a stock which was formerly a price leader and which had been lagging market in last six month."
Which condition checks for the stock lagging the market in last 6 month. Is it price percent change from 1 to 25.

Thanks a lot.

Anonymous said...

Hi Pradeep
just want to say thank you for the knowledge and guidance you have given to us, i read pretty much your blog completely and stopped being afraid of trading with a plan based on your post here..following one of your ideas, i just netted 24% in TWO days in SMSI, again thanks...i guess a i just beated a lot of professionals and bloggers in two days as far of returns, again , thank you and my hat to you again

Pradeep Bonde said...

thanks for pointing that out. See correction:
Price percent change 26- weeks= rank 1 to 25

If you run this intraday, run it without 1000 volume condition as that will distort results.

Barry said...

I am simply amazed. You have so many well thought out ideas.

I have made more money by following your ideas and learned how to think like a trader.

The best thing about your blog is it teaches how to fish and does not provide ready made picks.

I just sent you a small paypal donation. Again thanks for your excellent blog.

BEIT said...

Pradeep,

Great blog, valuable advice.

The question irrelevant to this post, but related to your earnings breakout strategy. Why Walgreens (WAG) did not respond to a positive earnings and revenues surprise today? Is it because of the price action during the two days prior the announcement? Thanks.

Pradeep Bonde said...

There was no major surprise in fact compared to last few quarters earnings were not good. Plus earnings breakouts work on unloved, unfollowed stocks. WAG has several analyst covering it. It has a float of 992 million, these kind of stocks seldom react to earnings. In such stocks earnings are anticipated.

Pradeep Bonde said...

Barry
Thanks

Anonymous said...

Andrey,
WAG had positive earning's and revenue's growth, but not an earning's surprise, and the surprise is what matters. WAG didn't meet Wallstreet's expectations. Even if a company has triple digit earnings' growth, if it doesn't meet the street's expectation, it will decline. The fact that the street has so high expectaions for WAG is indicative that it is a company well followed by many analysts and the probability to surprise with higher earnings or revenues is way too low.

BEIT said...

Thanks, guys. Got it. I guess, using similar reasoning, not much should be expected from SNX and AMSWA following their later announcements tonight.

Barry said...

What if I use Price growth 2 year or 3 year instead of 1 year. I tried that it gives wider universe to work with. Your thought on this please.

This thing is interesting. I already found many good short candidates in this scan.

Pradeep Bonde said...

No harm in trying it out. The idea should be to find 25 to 30 best opportunities, too many things can be distracting. Plus my testing and results show best results with one year.

OptionPundit said...

that's quite an insightful post Dear Pradeep. Thanks for sharing your thoughts.

Regards,
OP