Stock Trades: Sizzling Summer Rally Setting Up Short Basket
By: Christopher Mistal
July 12, 2016
Most years, especially when the market sells off during the first half or is flat, prospects for the perennial summer rally become the buzz on the street. Parameters for this “rally” were defined by the late Ralph Rotnem as the lowest close in the Dow Jones Industrials in May or June to the highest close in July, August, or September. Such a big deal is made of the “summer rally” that one might get the impression the market puts on its best performance in the summertime. Nothing could be further from the truth! Not only does the market “rally” in every season of the year, but it does so with more gusto in the winter, spring, and fall than in the summer. From its June 27, closing low of 17140.24, DJIA has rallied 7% as of today’s close which was also a new all-time DJIA closing high.
Winters in 53 years averaged a 12.7% gain as measured from the low in November or December to the first quarter closing high. Spring rose 11.4% followed by fall with 11.0%. Last and least was the average 9.0% “summer rally.” Even 2009’s impressive 19.7% “summer rally” was outmatched by spring. So beware the summer rally hype as it is usually the smallest rally of the year and can fade just as quickly as it began. S&P 500 and DJIA have managed to break out to new highs, but NASDAQ and Russell 2000 continue to lag. Without tech and small-cap support, large-cap stocks could soon run out of momentum.
[Summer Rally Table]
Short Stock Basket
This basket of 16 possible stocks to short spans the three market cap ranges in the Almanac Investor Stock Portfolio. There are three Small-Cap stocks (less than $1billion), six Mid-Cap stocks (greater than $1 billion but less than $5 billion) and seven Large-Cap stocks (greater than $5 billion in value). Our screening process involved an in-depth review of fundamentals, such as revenues and earnings, valuation metrics like price-to-earnings and price-to-sales ratios, each stock’s technical situation as well as price and daily trading volume. Seasonally weak sectors, like materials, transports and cyclicals (and oil which begins in September) were also given extra attention and produced more than half of the stocks in the basket. 
The broad criteria for inclusion on this list relied primarily on revenues and earnings (past and future estimates). Generally, stocks that are exhibiting decelerating, flat or negative revenues ranked high on our list of short candidates. From this batch earnings also needed to be decelerating, flat, negative or estimates are weak. Out of this trimmed list, stocks with elevated P/E and/or P/S ratios were retained. Finally share price and volume were considered. From a list of several thousand stocks, these 16 remained. There are worse stocks out there, but many of them had already fallen a substantial distance. Whereas, this basket still appears to offer plenty of downside potential in coming months, especially if energy prices begin to weaken early. Some are trading near 52-week lows while others maybe just a few percentage points off of 52-week highs. 
Remain patient as the first half of July is historically bullish, but afterwards the worst-two-consecutive-month span, August through September, begins. Like past short trade ideas, there are two possible prices presented to establish a short position. The first is labeled “Short @ Resistance” in the table below. Should a stock rally toward this price then stall and loss momentum a short trade can be considered. Look for corresponding weakness by MACD, Stochastic and relative strength indicators to confirm. The second price to consider shorting the stock is listed in “Short on breakdown below”. This is the stock’s current projected support level. If the stock breaks support a short trade can be considered. Regardless of short trade entry price, the suggested stop loss is the same initially. All 16 short stock ideas will be tracked in the Almanac Investor Stock Portfolio which is currently scheduled to be fully updated on July 19 (sooner if conditions warrant).
[Summer Shorts Stock Table]
Disclosure Note: At press time, officers of the Hirsch Organization, or accounts they control did not hold any positions in the stocks mentioned, but may buy or sell at any time.