Re: [CANSLIM] M - How low will it go - reverse CANSLIM.

From: <vchang@win-invest.com>
Subject: Re: [CANSLIM] M - How low will it go - reverse CANSLIM.
Date: Sun, 21 Jul 2002 23:45:10 +0100
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First I want to say that this is one of the best lists I have ever joined in
terms of the signal to noise ratio and general quality of contribution.

<SNIP>
Maybe what we need is a kind of reverse CANSLIM to help us take advantage of
the bear markets.  Some basic principals to identify falling stocks - both
fundamentally and technically as CANSLIM does so well with rising stocks.
<SNIP>

Sorry about such a long post due to the included article from IBD.  :-)

I was intrigued by Ira's idea of turning CANSLIM on its head
(Counter-CANSLIM or ANTI-CANSLIM?), and found that real life hedge fund
managers are indeed doing this for real.  (See IBD ARticle attached below).

WON did not have a lot of good things to say about shorting stocks,  I do
wonder if anyone on this list has been successful shorting.

One shorting idea I am trying out is to take a small (less that 20% of the
portfolio's value) portfolio of shorts in QQQ, SPY, DIA and an ISHARE of the
UK market index.

Besides trying to make a little money, the big idea being doing this is that
if I have a real short position in the major market indices then I will be
highly focused and motivated in monitoring them and the relevent charts -
hopefully improving the chance of judging M correctly as well as noticing
divergence between major indices etc.   I also feel safer shorting ETFs as
opposed to individual stocks.

Regards

Victor Chang (vchang@win-invest.com)
www.win-invest.com

=============  FROM IBD =============================
General News
Monday, July 22, 2002
Looking for a recent story in IBD? Visit the IBD Archives. Printer-Ready
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Who Can Crow In This Market? Short-Selling Pros Sitting Pretty
BY KEN HOOVER
INVESTOR'S BUSINESS DAILY

Short sellers are in hog heaven. And shorting is getting more popular as the
bear market grinds on.
New York Stock Exchange short interest released after Friday's close was a
record 7.6 billion shares. The short interest ratio was 4.3, down from
recent highs due to heavy volume.
Most investors watch their stakes decline. Others content themselves with
money-market rates while waiting for a new bull market. Short sellers profit
by selling borrowed stock and buying it back later at a lower price.
Indeed, the short sellers are raking it in. The short-biased component of
the CSFB/Tremont Hedge Fund Index gained 7.6% in June and is up 9.3% year to
date. The highly dangerous Rydex Venture 100 Fund, which shorts the Nasdaq
100 index, leveraged by a factor of two, is up 95% for the year.
Short selling is tricky. Even professionals confess it's harder to find the
right entry point than it is when going long with a stock. Bear markets and
falling stocks have fierce whipsaws, sometimes crashing down one day and
rocketing up the next as short sellers close out their positions by buying
back shares, or covering, as it's called.



 Image: Shortage Of Fear?



Robert Maltbie's Millennium Asset Management in Nipomo, Calif., runs $20
million going both long and short. He thinks the market now is ruled by
hedge funds that are aggressively shorting.
Spectacular Reversals
He says that's why we're seeing huge reversals, such as last Monday's
snapback from a 400-point Dow deficit and the 324-point, post-holiday July 5
rally.
Those rallies are being driven by hedge funds covering, he thinks.
It may be good for the bulls that so many investors are shorting. When
everybody is so pessimistic, maybe a new bull market is right around the
corner.
The short-interest ratio is one way to measure the popularity of short
selling. Since May 1931, NYSE members have reported their and their
customers' short positions to the exchange as of the 15th of each month.
The exchange releases the number four days later. Because trades settle in
three days, the release is a snapshot of short selling on the 12th, assuming
it's a business day.
The ratio is calculated by dividing the total number of shares held short by
the average daily volume for the past month. A short interest ratio of 4.3
means it takes 4.3 days of average volume to cover all those shares held
short.
IBD charts the short-interest ratio daily on the General Markets Page, B2 in
the print edition. Rather than use the past month's volume as of the 15th,
though, IBD calculates the ratio with volume from the prior month as of the
day before publication.
For decades, the short-interest ratio was one of the market's best contrary
psychological indicators.
"Readings over 1.75 are followed by rising prices between 94% and 98% of the
time, about as close to perfect as one can expect in the stock market,"
wrote Norman Fosback in his '75 classic, "Stock Market Logic."
But in the late '70s, the ratio started rising due to professional hedging
and arbitrage strategies. In June '97, the ratio hit an all-time high of
7.34, a level Fosback never dreamed of.
But it still has value. It dropped to 3.70 in January '01, when investors
were greedy, and has been rising since then as fear built. Some analysts
track its variance from a 12- or 16-month moving average.
Since December '86, the Nasdaq has released a short-interest report eight
business days after the 15th of each month. It breaks down short interest
between big and small caps.
Nasdaq stocks are less likely to be part of an arbitrage strategy. So it's
no surprise the Nasdaq small-cap short-interest ratio has been a somewhat
better sentiment barometer.
It hit an all-time low of 0.36 as the market peaked in March '00. It hit an
all-time high of 3.07 as the market sold off in September '01. June's
reading was 1.56, showing above-average bearishness.
Among the hedge funds that have benefited from short selling is Maltbie's
Argonaut Fund, which goes long and short. It's up 11.5% year to date. That's
driven by a 23% profit in his short positions.
"Part of our strength is that we are short selling on a daily basis in good
times and bad," Maltbie said. Dianon Systems (DIAN) is one of his recent
short-side successes. He shorted as it broke down early this month on an
earnings warning. He covered quickly because he wanted to lock in profits
before other short sellers lock in theirs.
"You don't know when they're going to cover or why, but you know they are,
so you better cover before they do," he said.
Maltbie uses the CAN SLIM system to buy stocks. He turns the system upside
down for shorting, buying stocks that break down, showing declining relative
strength and often buying as a stock breaks below a key support level, like
the 50-day or 200-day moving average.
"Old support becomes new resistance," he said.
Mark Boucher, who runs money from his Investment Research Associates in
Menlo Park, Calif., also likes to take profits quickly when he successfully
shorts a stock.
He takes partial profits when he's ahead 40%, then uses trailing stops to
take the rest unless he covers into a selling climax or a big rally on
volume. "A bear market rally can erase six months of profits in two days,"
he said.
He also uses some IBD techniques in reverse. He looks for short-sell
candidates on the new low list and among stocks with declining earnings
growth, declining institutional sponsorship and high debt.
He likes to short when a stock breaks down after a four-week consolidation.
Thanks to short selling, he's up 10% this year. He says 2000 was his best
year. He was up 70%. Many stocks, he says, were declining even as the tech
and growth stocks were still advancing.




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