The sharp investor never takes stock tips blindly.
Yet he or she will keep an open mind and consider ideas from knowledgeable, trusted sources for serious study.
(Right now you might think: Isn’t the art of investing paradoxical?)
For short sellers, it’s wise to continually look for ideas. After all, most of us do not work for bulge-bracket investment banks that hire dozens of industry analysts.
IBD’s “Making Money” section and the intraday market updates at IBD’s Stock Market Today on Investors.com can help. These columns will highlight stocks that fail fast after breaking out of a late-stage base. Finding these sorts of breakdowns is a key step in winning at the short selling game.
Launched in the summer of 2011, Leaderboard has two big missions. The first: Identify top-class stocks that are poised to break out to new highs and make solid gains during a market uptrend. That’s the job of the Leaders List. The second mission: Identify former big market winners that have topped and may present valuable shorting opportunities.
Former leaders are among the best candidates for shorting. IBD research has found that the average decline of a past market leader is 72%. So if such a stock topped at 100, it could fall as far as 28 before it finally bottoms out.
When you view the stocks on the Cut List, keep in mind that not every stock featured is immediately at a short sale point. Some of these names come from the Leaders List after showing poor action.
IBD’s team of markets writers and editors monitor each stock’s action to determine whether it may be approaching a short-selling entry point. Some stocks will rebound and return to the Leaders List. Others might limp along, neither strong enough to buy nor weak enough to sell short, and eventually are dropped from the Cut List.
Right now, few stocks are on the Cut. At the start of the year, nine made the list. When the market shows signs of severe weakness and the major indexes go into correction, expect the list to expand.
Rackspace Hosting (RAX), the San Antonio-based innovator in cloud computing, made a spectacular run from its 2009 bottom at 4 to a peak of 81.36 in late January this year, a 1,934% gain in less than four years.
But its breakout from a third-stage cup-with-handle base at 70.10 didn’t yield a 20%-to-25% gain. Instead, the stock fell sharply for four straight weeks. When it cut through the 10-week moving average in big volume with the ease of sharp scissors through ribbon, it was the first proper short entry point.
By mid-April this year, Rackspace slumped 46% from its peak. A two-week rebound came in thin volume. On May 6, when Rackspace closed at 49.95, the stock entered the Cut List 1. Three days later, the stock plunged 25% on a disappointing Q1 report (a 12% EPS increase marked the fifth straight quarter of decelerating growth).