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Maybe it's the frigid weather outside (we're down in the single digits with more snow on the way). Or maybe it's that the waistline of my favorite jeans seems to have shrunk a bit since Thanksgiving. Whatever it is, for several days now I can't seem to get away from an incessant desire to SHORT some stocks!

A more likely culprit of my hankering to dabble on the darker side of the trading ledger is that there are troubling signs the current bull run may be on its final, increasingly feeble legs. The S&P 500 has closed lower - albeit modestly - in the last 9 of 11 sessions. A number of those days, along with several others that precede them, have been "distribution days". A "distribution day", according to William O'Neil, founder of Investor's Business Daily and author of the perennial bestseller, How to Make Money in Stocks (McGraw-Hill), is a trading day that sees one or more of the major indexes close lower by greater than -0.2% on volume greater than the previous day's volume. According to "The Big Picture" column on IBD, as of this writing the S&P 500 and the Nasdaq have each printed 7 distribution days in recent trading. O'Neil writes in his book that so many distribution days in so short a span signals that a significant top is likely in place and that a strong correction is imminent.

I have developed my own spin on what counts as a "distribution day". Using data offered by Sherman and Tom McClellan on their site, McClellan Financial Publications (click on the "Market Breadth Data" tab), I like to see the following three indicators line up before I use the "D" word

  • A down day on the DJIA (of any degree),
  • NYSE Decliners leading NYSE Advancers, and
  • A negative value for the McClellan Volume Oscillator (MVO).

By the McClellan data, I count 9 "D days" over the past month. In the spreadsheet below, adapted from the McClellan site, the purple lines mark the days when all three bearish indicators lined up:

Data courtesy of McClellan Financial Publications

I don't have reliable data on whether 9 observed "D days", as I define them, holds any magic in predicting a bearish reversal of trend. I'm still new to O'Neil's idea of counting HLC bars and volume candles and trading accordingly. My preferred market timing model is built on a combination of moving average crossovers, divergence in momentum oscillators, and trend analysis of cumulative volume balance. But the idea of tracking noteworthy share distribution makes good sense to me. As O'Neil says in his book, the presence of a string of distribution days does not necessarily mean a bear market is coming, but there has never been a bear market that hasn't been preceded by a series of distribution days.

Thus with the major indexes currently pulling back from their peak values, with the number of high volume distribution days rising, and with several "correction catalysts" on the horizon (e.g., an FOMC announcement this month, debt-ceiling haggling next month, etc.), it seems prudent to shift our focus, at least for now, from finding the next big winners for 2014 to finding a set of candidates for short-selling, at least over the near term.

I have a number of screens I use to build watch lists of viable short-selling candidates. I normally scan first for technical setups, then confirm the best of the passing candidates by comparing fundamentals. In my experience, the best stocks for short-term (two weeks to two months) short positions display most if not all of the following:

  1. Prior to the market's topping action, these were stocks in strong uptrends. At their most recent pricing peak, these stocks were trading at 12-month returns that more than doubled the return of the broader market averages. They were the leading stocks of the market's last leg up, and could be found on many of the bigger players' "must own" lists.
  2. These once high-flying market leaders have recently encountered trouble. While the broader market might be drifting sideways, these stocks have recently been hard hit by problems unique to their businesses. Perhaps an unexpectedly poor earnings report - like Questcor Pharma (QCOR) back in October - knocked them off-trend. Maybe the FDA said "no" to a new drug approval - think Serepta's (NASDAQ:SRPT) Eteplirsen - or perhaps there was an embarrassment with a new product - think Lulumon (NASDAQ:LULU) and their breezy yoga pants, or Tesla (NASDAQ:TSLA) and their too-hot-to-handle engines. Whatever the cause, these former champions of the watch lists have recently been de-listed.
  3. The drop in price has caused the stock's shares to trade at or under their 50sma. They may try a number of rallies to regain that critical level, but each low-volume attempt is typically met with strong selling pressure, sending shares back down. Henceforth, the 50sma will act like a ceiling instead of a floor.
  4. The 50sma itself is flat to trending down. When on the upswing the 50sma confirmed the trend, acting as strong support for pullback. Now this much-watched moving average of price is clearly showing a loss of momentum.
  5. On the fundamentals side, we want to see recent problems: year on year these companies still may have great numbers, but their most recent quarter was disappointing. We want to see negative Q/Q EPS and sales growth numbers. If we also see analysts lowering estimates, institutions and insiders cutting positions, or margins contracting, so much the better.

I ran one of my scans that seeks to quantify a number of the items on the above list. The scan filters out stocks trading over $7 per share, over 100k average daily volume, and which are up over 50% over the past 12 months, but which are currently down at least 10% below their annual high. They also show a decrease in Q/Q EPS and/or sales in the past quarter. My scan returned the following 20 potential shorting candidates:

(Click to enlarge)

Data courtesy of

As I scanned the charts of these companies, a phrase kept running through my head, "Oh, how the mighty have fallen!" With not quite the same fervency as David's lament over the death of Saul, many of these once favored companies, for various reasons, are now in the grieving process. Some may yet regain "darling of Wall Street" status. But the charts and recent earnings performance paint a bleak picture for the near term.

With this short list in hand, then, I applied a simple 3-step process designed to tease out the top candidates. I first dug deeper into the numbers, then I worked over the price charts, and finally I rummaged around in the news cycle. Please note that my sorting process offers no guarantee that the following 3 stocks are the best shorts on the list. They are only likely to be, given what we currently know. This is to say, as always, you are best off doing your own due diligence.

Bridgepoint Education (BPI)

Of our 3 candidates, Bridgepoint Education has the strongest fundamentals. The educational software company sports a composite rating of 59 out of 100 on the IBD scale. This scale ranks, among other things, a company's earnings and sales growth, return on equity, and relative strength. But while not horrible, a score of 59 is nearly 30 points lower than its rating just 7 weeks ago. Causing BPI's fall from grace was a downgrade by Deutsche Bank (from Hold to Sell) on November 4th, then the company's earnings announcement the next day. BPI missed on both the top and bottom lines. In more recent trading, news of 5 insiders selling shares has not helped the BPI cause.

Here are the numbers. They are not pretty:

· EPS % change in the last quarter: -66%

· EPS growth over the last 3 quarters: -55%

· EPS estimate % change for the current quarter: -96%

· Last quarter EPS surprise: -28%

· 3 year annual EPS growth rate: -14%

· Sales % change last quarter: -26%

· Accumulation/Distribution grade: D-

The daily chart for BPI clearly shows the aftermath of the downgrade/EPS fail from early November. Share price fell sharply off its annual highs to close, and then trade below, the 50sma. 3 attempts to rally over the 50sma were each met with selling pressure. A tender offer of shares has put renewed pressure on the stock over the past two trading sessions. There is currently support in the 16/16.50 area, and the technical indicators are oversold. But a rally into the 18 area would provide a nice place to establish or add to an existing short position. The short-term target is the unfilled gap below the 14.00 level.

(Click to enlarge)

All charts courtesy of

OshKosh Corporation (OSK)

This maker of specialty heavy-duty trucks is currently ranked #322 on the Fortune 500 list, but its recent EPS miss at the end of October may mean that its glory days as a high-flier are on the wane. Shares were hard hit after the earnings announcement and have not recovered since. OSK sports an IBD ranking of only 36 out of 100. Louis Navellier, the growth stock guru, gives OshKosh a grade of "F" for both earnings growth and sales growth. The company lowered its own EPS estimates for the current quarter on an anticipated reduction in defense sales (blame the sequester!), and insiders have been selling shares.

The rest of the story doesn't look much better:

· EPS % change in the last quarter: -167%

· EPS estimate % change for the current quarter: -207%

· Last quarter EPS surprise: -44%

· 3 year annual EPS growth rate: 0%

· Sales % change last quarter: -36%

· 3 year annual sales growth rate: -12%

The daily chart for OshKosh shows a head-and-shoulders-ish topping formation, with the "head" clearly marked by the Halloween EPS-surprise fail. Note that volume is heaviest on the selloffs, and lightens up on the feeble attempts at a relief rally, with the 50sma acting as resistance. Shares are nicely positioned here for initial positions, with an add-on point just below the support line at 48.00 if it can break. Support for short-term targets can be found at the 200sma (44.00) and an unfilled gap around 41.00.

(Click to enlarge)


Just the name of this company should give us pause. This is the company that makes those $700 "Roomba" vacuum cleaners that clean the carpets all by themselves. Great idea! Lousy performance! In any case, IRBT has been doing military robotics for several years now. Today their focus is on civilian applications, including robotic doctors ("oh, doctor, your hands are so cold!"). All cool-sounding stuff. But the hype that drove shares up over 100% the first 6 months of 2013 may have been overdone. Even a 25% haircut off its peak price this year leaves the company with a rich multiple near 50, a PEG ratio over 5, and an IBD composite score of only 18 out of 100 (ouch!). I like IRBT longer term, but the current downtrend looks like it has more room to run.

Let's do the numbers. If we include the relative strength reading, they are the ugliest of our group of 3:

· EPS % change in the last quarter: -59%

· EPS % change over past year: -58%

· 3 year annual EPS growth rate: -2%

· Sales % change last quarter: -2%

· Relative strength rating: 45 out of 100

· Institutional transactions: negative

· Accumulation/Distribution grade: D-

· Piotroski F-rank Score: 3 out of 9

The chart for IRBT shows price falling out of a bearish descending triangle/wedge formation. Unfortunately, shares have now moved beyond an ideal point for initiating new short positions, so it may be best to wait for a relief rally into the 32-area (ideally on lower volume). That would be the perfect entry for a 20% move down to the unfilled gap below $26, the short-term target.

(Click to enlarge)

So there you have it: 3 shorting suggestions for the coming weeks. Keep in mind that each of these companies, like the others on the list of 20 candidates, carry all the risks associated with short-selling. As former high-fliers with plenty of bullish fans clinging to hopes of a rebound, and trading as they are within a market that is still in an uptrend, those risks are elevated. But if you are, like me, in the mood for a bit of bopping what may well be a significant market top, you might give these a good look-over.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.