Category: Commentary

 

There are many different ways to make money in the stock market. What they all have in common is that none of them work all the time. Each has its “sweet spot” period when they work flawlessly and deliver incredible results.

I decided to take a look at the best performing stocks from their 52-week lows. My screens returned six stocks that have more than quadrupled from their lows.

One silver miner, one gold miner. SA reached its 52-week low in mid-2015, it made a higher low during the market correction in January this year, showing relative strength.

In any given year, some of the best performing stocks are usually the ones that surprise the most. This is why they often come from industries no one expects. Gold and silver miners were among the worst performers between 2011 and 2015. Most of them were down more than 90% from their all-time highs. They had so many fake attempts for a recovery during those years that by 2016, many people didn’t even want to think about them, not to mention buy them. When a heavily neglected industry meets newly discovered catalyst, we could see some major moves.

CDE reached its 52-week lows with the rest of the market. Most stocks tend to top individually and bottom as a group. This is the case because correlations are relatively low during rising markets and very high during corrective markets.

Two biotechs – ARGS and CPXX.  Biotechs are always on the best and worst performers lists. Their products are either huge hits and revenue generators or zeroes. While it is not wise to gamble with FDA approvals, many biotech stocks provide multiple entries and setups after their drugs have been approved.

Look at CPXX for example. In March, it gapped 350% on 30 times its average daily volume. Then, it proceeded to go up another 100% in the following month, providing multiple entries for intraday and swing traders.

ARGS has a quick 4-day momentum run from $5 to 8.50 in late March. Then, just like many momentum stocks, it pulled back to its rising 10-day EMA (exponential moving average) and set up again. We highlighted it near 6.60 in our daily swing trade reviews on MarketWisdom.com here and here. It has more than doubled since then.

Two special situations – a pollution and treatment control services ERII and a weight loss program in the case of WTW.

In the case of WTW, Oprah announced a stake and strategic partnership. WTW gapped up 70% on the news. Then it went from 12 to 28 in the following month, again providing several good entry points after the big-volume gap.

Here’s a list of 12 stocks priced above $10 and trading over 200k shares per day. All of them are heavily shorted – more than 20% of their float is short at this point of time.

Stocks with high short interest are likely to significantly outperform in the initial stages of a market recovery. High short interest could be a powerful short-term catalyst. When prices in a heavily shorted name start rising, short-sellers have a few options:

1) Cover for a small loss. In this case, they become buyers.

2) Sit, do nothing and pray that they are not squeezed out of their position.

3) They are forced to cover their shorts as they become reluctant buyers due to margin calls.

4) Hedge long-term short stock positions with short-term calls.

5) Add to their short position or average up – this could be very dangerous and lead to a major short squeeze down the road.

The most powerful short-squeezes tend to happen at the beginning and at the end of a major market uptrend because short-sellers don’t believe that a short-squeeze could happen at those levels. At a beginning of a new major trend, they are too complacent due to a recent period of making a lot of money on the short side or watching other people make money on the short side. They under-react to new developments in supply/demand dynamics, which is a great recipe for a short-squeeze. At the end of a major uptrend, many of the most heavily shorted stocks have gone up a lot and most short sellers don’t think that they could go any higher. In financial markets, the obvious rarely happens, the unexpected constantly occurs.

High short interest doesn’t guarantee that a stock will squeeze higher. It is just potential energy. When combined with momentum, it could lead to higher prices.

2016 started with a major selloff during which most equities were highly positively correlated. In other words, most stocks moved together in the same direction – up and down, regardless of individual merits. This is a typical price behavior in times of panic and the ensuing bounces from oversold breadth levels. It is also one of the main reasons many people focus on trading high-beta ETFs in times of unusually high volatility.

As volatility subsided in the past couple weeks, correlations dropped and stock picking started to matter again. Stocks that beat earnings estimates and initially received favorable market reaction started to outperform. Academicians have named this process P.E.A.D. or Post Earnings Announcement Drift – stocks that gap up on a better than expected earnings report, tend to drift higher for several days to several weeks; stocks that gap down, tend to drift lower.

This is not just a temporary phenomena. It could be observed and traded successfully almost every earnings season by traders with various time frames – intraday, swing and position trading.

Here are some examples from the past couple of weeks.

Positive Market Reactions:

Negative Market Reactions:

Why do stocks continue to drift in the direction of the initial market reaction?

There are two plausible reasons:

1. People tend to under-react to new information, then they panic (either because of fear of missing out or fear of losing) and over-react.
2. Institutions need more time to build a new position or to distribute an existing one.