If you would like to read Chapter One of my new book Buy The Fear, Sell The Greed – 7 Behavioral Quant Strategies for Traders please click here.
Today’s Connors Research Traders Journal is going to look at potential profitable opportunities in shorting stocks. These opportunities are backed by academic studies which show large edges in shorting lottery stocks.
Lottery stocks are stocks where traders and investors believe can provide them with large short- term payoffs. Walk by any store that sells lottery tickets and you’ll see the overall success of people who buy lottery tickets. That same behavioral concept has been applied to speculative investing and you can read about it here as follows:
1. Start with this great article, “Investors Love Lottery Stocks”, which summarizes the shorting opportunities along with the academic studies that provide the research. http://thebamalliance.com/blog/investors-love-lottery-stocks/
2. Follow it up with this less well-known academic study which further confirms the edges – “Short Interest and Lottery Tickets” https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3006067
3. If you haven’t already purchased Buy the Fear, Sell The Greed, do so. We created a short equity trading strategy named “CRASH” which is published in Chapter 4 of the book. We created the strategy awhile ago and it systematically identifies when to precisely time these lottery ticket stocks. We developed this strategy well before the academic studies were published so it’s good to see the academic world see what the CRASH strategy has seen for years. Runaway lottery stocks have had large edges on the short side and for a number of behavioral and structural reasons according to the top article above, they’ll likely be there for years to come.
I hope you enjoyed this issue of the Connors Research Traders Journal.
Enjoy your trading!
Connors Research LLC