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.

The market dipped a little, but then rallied again and the S&P was up 2.9% by July 26. Of the nine stocks produced by my bearish filter, four were higher, four were lower, and one was unchanged over that month. The average move was -0.07%, so you had shorted all nine stocks you would have basically broken even in the first month. After three months, the S&P was basically unchanged, but five of the nine stocks that I got a bearish signal on were lower and four were higher. The average move was -8.67%. If I had shorted all nine stocks, my average gain would have been 8.67% while the overall market was flat.

Now that you have some background on my filter and how it has performed in the past, you’re probably asking, what about today?

Running the Filter on February 25

When I ran my filter on February 25, it produced a list of 20 potential short candidates. These are stocks that have “sell” or “strong sell” ratings from Tickeron, have poor SMR ratings, and got bearish signals from the stochastic indicators. There are also filters for a price of $10 or more and trading volume of over a million shares a day. I put the last two filters on for several reasons. When you get stocks priced below $10 or are thinly traded, they can become hard to borrow.

Shorting 20 different stocks at one time is probably out of question for the average investor, so I looked at the charts for the 20 stocks on the list. I looked for ones that might be in a long-term downward trend or were facing possible resistance points. That allowed me to narrow the list down to three stocks that I felt had the greatest chance of falling over the next few months.

The three stocks were Liberty Global- C Class Shares (LBTYK), Matador Resources (MTDR), and Yext, Inc. (YEXT). Liberty Global provides broadband internet, video, fixed-line telephony, and mobile communications services to residential customers and businesses. Matador Resources engages in the exploration, development, production, and acquisition of oil and natural gas resources in the United States. Yext is a cloud-based company that engages in delivering brand-verified answers that puts businesses in control of their facts online. Its Yext platform lets businesses structure the facts about their brands in a database called a Knowledge Graph.

Liberty Global has been losing money over the last few years and revenue has been declining in the process. As a result of the losses, the company has a negative return on equity of 11.07% and the profit margin is -13.6%.

Matador Resources has rallied recently as oil prices have jumped. The company has struggled in recent years and the current return on equity is -31.8%. The profit margin is -68.8%.

Yext has lost money in each of the last eight quarters and it is expected to lose money again in its next earnings report. The losses give the company a return on equity of -51.8% and a profit margin of -31.1%.

The combination of the poor earnings results, the negative ROEs, and the negative profit margins contribute to the poor SMR ratings for these three companies. All three were or are overbought based on their daily and weekly stochastic indicators. All three also look primed for a pullback over the coming months, regardless of what the overall market does.