5 Leading Stocks in Possible Short Set-Ups

08/23/2011 7:00 am EST


Joshua Hayes

CEO, President, and Founder, Big Wave Trading, Inc.

Market history reveals the right time to watch for short candidates, Joshua Hayes says in today’s interview with MoneyShow.com’s Kate Stalter. However, he recommends that newer investors use caution and master the long trade before shorting. Hayes also discusses some strong names from the gold and silver sector.

Kate Stalter: We are speaking today with Joshua Hayes of Big Wave Trading, and he happens to be talking to us today from his office in Maui, so I’m sure a lot of people are going to be envious of that. I should mention that Josh also is a long-time columnist at SeekingAlpha, so great to be speaking with you today.

Joshua Hayes: Thank you Kate. It’s great to be speaking with you today.

Kate Stalter: Give us your take on what has been going on in this crazy market, and what you believe individual investors should be doing at this juncture.

Joshua Hayes: Okay. Well, first off, in 2011, my portfolios topped out around January, and they churned heavily from January to July. During this time, I had a tough time figuring out: Did we want to break out to the upside, or break down to the lower side?

Everything chart wise, because of the heavy distribution throughout the early part of 2011 and the way the past leading stocks from the 2009 rally were acting, was going to tell me we were going to break down.

But QE funny money kept us going higher...but finally in July we got the big crack on heavy volume in the Nasdaq, and finally then broke down below the 50- and 200-day moving average and completely rolled over.

While that was happening throughout July, high-quality short set ups were setting up and breaking down, and the distribution makes it look like the downtrend is going to last longer than people hope for. Sentiment is so very bullish out there. Investors Intelligence Survey has 46% bull to 23% bears, and it just looks like it is going to be lasting for a while.

My suggestion for individual investors is to not buy stocks here. We have to wait until the big-volume down days end and we start getting some upside progress on heavy accumulation. Right now it is just not safe for individual investors, and I do believe cash is where they should be.

Kate Stalter: One of the things that I know you’ve done in the past is to short stocks. Is that something you think individual investors should be doing or staying away from? Give us your take on that.

Joshua Hayes: If you are a new investor, I always recommend that you do not try to make money on the short side. It is much more difficult than the long side.

However, once you have some time and experience under your belt, you can make money going long stocks, you have more confidence, and know your chart patterns and history better. These historical patterns have been setting up for 130 years; nothing has changed.

The optimal time to short, though, is when the market is breaking down. We clearly have that, and you have got to have a previous big uptrend.

Most of the stocks that I go short whenever they do set up, which a lot of them have not yet, like Netflix (NFLX), Baidu (BIDU), Google (GOOG), Apple (AAPL), and Amazon (AMZN) are what I am looking to short because they have had very large gains from the 2009 bottom.

Some stock I am currently short now are Salesforce.com (CRM), Priceline (PCLN), and then Liberty Media (LCAPA). They all have given me the signals to go short.

It is a very, very difficult game, but whenever you have had a very long uptrend, you have all the technical signals that we are going to enter a significant downtrend. It’s not too difficult for me, but as I’m going to say, I’ve been doing this for 16 years, so I have seen some tops.

I got the 2000 top pretty much nailed, just basically on technical action. It was nothing I did; it’s what the market did. In 2007, I was writing for realmoney.com back then, and during late 2007 I posted chart after chart after chart of the leading stocks, showing that we’re going to probably have a significant correction...and, of course, as we know, 2008 happened.

It’s nothing I do; it’s what the market has been doing for 130 years. But, shorting is very difficult, and I definitely recommend you have some experience under your belt on the long side first.


Kate Stalter: Now, speaking of the long side of investing, are there any industries or sectors that you see as perhaps holding up better right now? Not that they’re not necessarily buy candidates, but that are holding up better than others right now?

Joshua Hayes: Yes, absolutely, Kate, but sadly I have long scans that look for stocks that are making moves on heavy volume near 52-week highs above the 50-and 200-day moving average, and I always buy strength. I like to use the methodology that William O’Neil, Jesse Livermore, Nicolas Darvas, Gerald Loeb, Richard Wyckoff, and Ed Seykota use.

But right now, there is nothing like that out there, except for one sector: the gold, silver, and gem stocks.

And there are some gems out there, if I can pull up my MarketSmith really quick so I can get the names. The ones I personally like right now are Endeavour Silver (EXK), Richmont Mines (RIC), Aurico Gold (AUQ), New Gold (NGD), Minefinders (MFN), First Majestic Silver (AG), Yamana Gold (AUY), Royal Gold (RGLD), and Randgold (GOLD).

These stocks all have very high-quality earnings growth and sales growth and have the proper fundamentals that I need to go long in a stock, and they are all in an uptrend in an industry that is holding up well.

Now, everybody thinks gold is going parabolic. It is looking a little risky here, but the gold stocks are breaking out at fresh new highs from pretty sound bases on strong volume, so I would be looking to possibly buy them off the 50- or ten-day moving average on strong volume, or what we like to call pocket pivot points.

Kate Stalter: And, should people be watching out for possible sell signals after they make these purchases? How should they handle these if they do make a buy?

Joshua Hayes: Well, whenever I make a buy, if I make a buy off the 50-day moving average, normally I have evidence and history behind me that shows the stock should be making gains immediately. If it does not make gains immediately and moves back to the 50-day moving average, I cut my loss fast. I do not like to hold on to losers at all.

The same thing with the ten-day moving average: Once it bounces, it should move. If it does not move, it is telling me something is wrong and the momentum is not there to make significant price highs.

In this market, three out of four stocks, possibly more, are not going to move higher. Like I said, the gold sector is the only one out there. Investing in there is risky, because the market will eventually find a bottom, a new rally will start, and these gold stocks will more than likely not be the next market leaders.

Kate Stalter: What are you advising your clients at this moment that their best course of action really is, at this point?

Joshua Hayes: Well, on my Web site, the subscribers that I have, if they are new, I still would prefer them to be in cash.

But we are going short. I currently have 26 shorts that make up about a 50% portfolio position. The rest of my portfolio is in cash. I have absolutely no new longs. I tried one new long lately, and it did not work.

So, my advice right now is: We are looking for short set-ups. Right now we are extended to the downside, and so a lot of these stocks are too far away from their 50- and 200-day moving averages to become safe short set-ups.

So, more than likely, if you break down here, I’ll be happy with what I have. If we back and fill, it will probably set up some more short set-ups. Like I said, if Netflix, Apple, and Amazon give me the signals that I need, I will short those heavily until I get signals to get out.

Kate Stalter: Well, thanks very much Josh. This has been a great viewpoint of the market from a technical perspective, and I really appreciate your time today.

Joshua Hayes: You’re very welcome, Kate. Never forget, fundamentals are the most important thing when considering buying stocks, but they are completely useless and worthless when determining when a top is happening, or when to sell a stock.

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