Worried About A Correction? These 3 Stocks Look Primed For A Pullback

Earlier this week I posted an article that pointed out a couple of indicators that were pointing to a possible correction. The article pointed out how the median short interest on S&P 500 stocks has dropped to its lowest level since 2000. And it looked at how there is a huge gap between the S&P and its 52-week moving average.

I mentioned how investors could buy an inverse ETF as a hedge against the overall market declining, but what if I’m wrong and the market continues to trend higher? Sure you would have some insurance against a big drop, but if the market moves higher, the inverse ETF is going to drop in value. Personally, I have found it beneficial to look for stocks that are overbought but have poor fundamentals.

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One tool that I use to find such stocks is the My Filters tab on Tickeron. I have a specific filter set up to look for companies that have received bearish signals from the stochastic and RSI indicators, have low SMR ratings, and have a “sell” rating or “strong sell” rating from the Tickeron Scorecard. If the market turns lower, these stocks are strong candidates to drop sharply—more sharply than the overall market. But what if the market continues higher?

One of the great things you can do with the filters on Tickeron is use the Time Machine feature to look back and see how the stocks would have performed at different points in time. For instance, at the market peak on February 21, 2020, my filter listed above generated bearish signals on 26 different stocks. Not surprisingly all 26 stocks were lower one month later with the average loss being 38.08%.

What about three months later, after the market had started to rally? After three months, approximately May 21, 2020, of the 26 stocks on the list, 21 were still down while five had rallied back and were higher. The average move was still -14.7%.

In order to be fair, I went back and looked at another date when the S&P was overbought based on its weekly stochastic indicators and its 10-week RSI, but it didn’t fall sharply like it did last February. I went to the date June 28, 2019, and by using the Time Machine function, I see that there were nine stocks on the screener that day.

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