Stock of the Week: Selling the Buying in Texas Industries
Along with the rest of the market, shares of ^TXI^ made significant new lows just after the Thanksgiving holiday. After dropping for five out of six trading days, TXI reversed and began a rally that would take the stock higher for the next seven consecutive sessions, a run of more than 30%.
Jumping onboard this kind of momentum can be tempting, especially when it happens to a stock that has been beaten down for weeks if not months. But for professional traders and active investors, stocks like these are more often sought after as potential short-selling targets than as “value buys” trading in bear market territory (as TXI has since July).
As shares of TXI closed higher session after session, the market for the stock became overbought in the short-term. The first sign of this was on November 30th, when TXI first became overbought and earned a downgrade to our “consider avoiding” category of stocks likely to underperform in the near term.
And as the stock climbed deeper into overbought territory, the downgrades continued. Texas Industries was downgraded again on the 1st of December and again on the 2nd, taking the stock to our lowest rating of 1 out of 10.
For traders looking for stocks to buy, the warnings to avoid TXI could not be clearer. However, for those traders looking for stocks to sell short, shares of Texas Industries has rallied to a point where, historically speaking, traders have been more likely to be sellers than buyers. This meant that significantly lower prices were to be expected in TXI over the next few days.
As the chart above shows, an intraday entry on the day following the stock’s downgrade to our lowest level allowed traders to take a short position in an already very overbought market. Compare, for example, a potential entry on the day of the initial downgrade to 1 to the entry method using the intraday approach noted above.
The difference – almost more than double – is borne out in the bottom line when the position is covered during the sell-off a few days later.
For traders and active investors looking to maximize their short-term trades, finding top (or bottom) rated stocks is good. But taking advantage of tactical edges like intraday entries is just as important. What traders may lose in overall trading volume, they tend to make up in better entries, higher win-rates and more gain per trade.
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David Penn is Editor in Chief of TradingMarkets.com