The Dow Jones Industrial Average (chart) closed at a record high notching its ninth day in a row of gains. A streak not seen since 1996. Furthermore, the small-cap Russell 2000 (chart) and the Dow Jones Transportation Average (chart) also closed at record highs. The S&P 500 (chart) is also a hiccup away from a record. The momentum and year-to-date gains in these markets are breathtaking, especially when you consider all of the potential headline risks here and abroad.
As a trader or investor it’s incredibly tempting and seemingly logical to commence a short position thesis right now as everyday a new record is being set. However, picking a top or getting in the way of this parabolic move can be painful and costly. Also, it is very difficult to initiate new long positions when everyone on the street knows at some point and time a pullback in equities will occur.
So what’s a trader do in this market environment? Personally, I look for individual names that may be experiencing a “one time” event which may create a buying or selling opportunity. For example let’s take a look at Spectrum Pharmaceuticals, Inc. (NasdaqGS: SPPI). Here is a company that lost over 37% of its value today and traded over 22,000,000 shares which represents almost half of its float. The plunge in the company’s shares were due to an unexpected forecast by the company indicating their full year revenue will decline dramatically over its core drug Fusilev. This news definitely caught the street off guard especially after the company had expected sales to rise this year.
So when I see a haircut such as the one Spectrum received today, I immediately look to the fundamentals to see if this is an over reaction, or if there is more downward pressure ahead. After taking a gander at the fundies, the one thing that stood out to me was the significant short interest in the stock. According to nasdaq.com, as of February 28th the short interest in Spectrum stood at a whopping 27,231,552 shares. This is almost 50% of the entire outstanding shares held short. Now who knows how much of the short position has covered since February 28th, or how many shares remain short? Of course, this is not the only metric I look at when considering taking action, but this particular metric most certainly stood out to me. What I have seen in the past with other scenario’s such as this, with such a large short position, and after a major sell-off such as the one Spectrum experienced today, at the very bare minimum some type of short covering rally typically ensues.
By no means am I suggesting to go long or short Spectrum or any other asset or index, what I am doing is highlighting the fact that in any macro-market environment whether its overbought or oversold, if you do your research and subsequent due diligence, there can be opportunities found long or short. That said, it is always best and in this environment required to consult a certified financial professional before considering any investment or investment strategy.
Have a good evening.