My, what a difference a few weeks makes....
Just before I left on vacation in early November, the 17 companies on my Red Flag Alert list were down an average of 32% since each had been added.
Here we are, roughly a month later, and as of Friday’s close it was down 22%. That’s quite a swing. Only three companies are lower: Enviva, Leslie’s and ChargePoint.
Yet, here’s the rub...
For the others, nothing has changed fundamentally. The only change is the price of their stocks. It’s something you could see coming, something I’ve hinted at…
Since launching the Red Flag Alert on May 9 – an arbitrary date if there ever was one – the goal was to spotlight companies that were likely to underperform the market.
And boy, did they underperform.
My Favorite Indicators
But as I’ve learned over my career, don’t confuse brains with any market. My two favorite indicators, mirror opposites of one another, assume that most people do. These indicators are not steeped in any specific methodology and have never, to the best of my knowledge, been back-tested...
But they work, and I’ve written about them plenty over the years, most recently, in July 2022, when I wrote...
During all of the years I was doing short-biased writing as a journalist, there was a pattern.
First, as the market went higher, my sources would clam up. They worried that if they mentioned an idea to me and I wrote about it, in turn drawing attention to the name, there was an increased likelihood that they would be squeezed higher. That almost always preceded an inflection point and a top in the market.
The opposite was true once the markets fell and my readership spiked – the point when it seemed like people started hanging on my every word. That almost always preceded an inflection point just before stocks rallied... or ran higher to another leg in the bull market.
Which gets us back to the Red Flag Alert, which surprised even me with the speed of the decline. As I wrote on September 24...
Even stocks of dubious companies don’t usually fall as much and as fast as these stocks have.
I (half) joke that by publishing this list I'm probably jinxing myself. If history is any guide, their rapid declines could very well be a sign this market – with as little conviction that it has – is at an inflection point and could spring higher. Historically, when my red flags start making me look smart – and people start paying attention – watch out!
But it doesn't really matter because in the short term, these stocks can have a mind of their own... and very possibly could be great trades on both sides. That’s up to them…
Indeed it is, and that’s exactly what happened.
Everybody Piled In
As often happens, human nature being what it is – and computer algorithms what they are – too many hedge funds and others were on the wrong side of the boat, in this case, being short.
You can see it in this list of some of the most heavily shorted stocks, which a friend pulled from the Goldman Sachs list of most heavily shorted stocks…
As always, what moves too far too fast in either direction, almost always is the perfect setup for swinging back the other way... down and up.
This time will be no different.
Beyond that, I continue to look for new names to add to the Red Flag Alert, whose concept is fairly straightforward: Rather than stocks to short, these are stocks to avoid.
After all, with thousands of stocks to choose from, unless you’re an active trader, why pick these?
Doomsday Dozen Strikes Again
Moving on, since we’re on the markets...
Last time we checked in with my friends at Mylongbow.com, their Doomsday Dozen fear/greed indicator was 43. That early last month, just before I left on my vacation – and just before the market hit the ignition switch.
It’s now 84...
I like this indicator, which measures a dozen signals of potential market risk, because it’s exceedingly easy to understand.
And if you’re wondering… the indicator hit 100 last July, just before the market started its multi-month 10% decline.
Will it hit 100 this time? We’ll know soon enough.
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DISCLAIMER: This is solely my opinion based on my observations and interpretations of events, based on published facts and filings, and should not be construed as personal investment advice. (Because it isn’t!)
Feel free to contact me at herbgreenberg@substack.com. You can follow me on Threads @herbgreenberg.
"Ageless market wisdom!" Herb, as always, thanks for the reminders!!
Seems like most pundits have moved from 100% chance of recession in 4Q22 to almost no chance of a recession in 4Q23. As most readers of Herb know, the majority is almost always wrong. Protection is really cheap right now.