Two Stocks Worth Shorting

After three weeks of weak action in U.S. equities we are heading into a new week, greeted by a major storm in the Northeastern United States and thus an additional factor we must take into account.  Who said this business was easy?

The S&P 500 lost roughly 3.55% over the past two weeks after failing to push to new 2012 highs in early October.  Earnings are to take the lion’s share of blame for the weak tape as of late, but from a technical point of view the major indices are not yet broken beyond repair.

The S&P 500 has simple support around the 1390 – 1400 zone before I would have to raise a more cautious flag.  The Russell 2000 as well as the Nasdaq look the same, albeit somewhat worse/weaker than the S&P 500.

Most cyclical sectors too thus far are acting more in line with a consolidation phase rather than a blow-off top.  Take the consumer discretionary sector for example; the XLY ETF remains in its latest up-swing that started in October 2011.  A significant break of this simple up-trend may make investors more nervous.

Regardless of a broader picture that still supports somewhat higher equity prices into year-end there are pockets of stocks worth playing the short side of.  Earnings season has left clearly visible trend reversal scars on a series of individual stocks.

Two names that I spotted last week were Louisiana-Pacific Corporation (LPX) and Validus Holdings, Ltd (VR).  Both stocks had good runs this year (LPX is up around 115% and VR is up 16.5% year to date still) and both stocks left at least near-term topping signals on their respective charts late last week.  Both stocks have clearly defined levels to lean against.

Last Thursday October 25th Louisiana-Pacific Corporation (LPX) tried breaking to new 2012 highs and out of a six day consolidation phase.  The attempt however failed and left an outside bar with a lengthy tail on the daily candlestick chart.  The setup should lead to at least some follow-through on the downside.

Stop: Last Thursday’s high at $16.73

Target: $14.00

As one word of caution however, please note that Louisiana-Pacific Corporation (LPX) has an earnings announcement before the market open on November 6.

Validus Holdings, Ltd (VR) tumbled 3.60% last Friday October 26 after an earnings announcement and left an ugly outside day on the chart.  A long red outside day at the top of a trend most often leads to some follow-through selling.

Stop: Last Friday’s highs at $37.40

Target: $34.50






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