4-18-2016 Before the Open

[Mike]

I seldom buy stocks that are not within 15% of a 52-week high. However, some low-in-base set ups look too good to pass up.
Fitbit (FIT) has earnings growth and has been in a downtrend for nine months. What struck me about the setup was FIT has made three waves down in its selling and then formed a head and shoulders bottom (reverse H&S pattern). It broke above the H&S pattern and above a declining tops resistance line on volume 120% above average volume, where I bought it. That amount of volume behind the breakout may bode well for a rise. I note that significant overhead supply does not come into play until the $27 level ($10 above the current price). So if the market doesn't roll over, I might expect to meet a 50% profit target. And even then, perhaps wait to see what happens at the overhead supply levels. Price is above support at the 50-day moving average, which has stopped declining and flattened out.

35638

I have updated watchlists in the high growth area.

[Pascal]

FIT is an interesting pic, especially since I always thought that CANSLIM was more about leadership.

Does this selection means that you are now also convinced that this market is more about shorts squeezing than chasing leadership?

FIT has a 93% short float ratio, which is rather high and implied that "everybody is short the stock."
This means that the stock probably has no other way to go than up.

Another question: since you are a longer term investor, do you keep positions through earnings or do you prefer to ease out just before earnings? FITs earrings are still far away, so this is not a question about this stock, but surely, earnings will move the price much, especially with the type of short ratio that we can see.


Pascal

[Mike]

FIT is an interesting pic, especially since I always thought that CANSLIM was more about leadership.

Does this selection means that you are now also convinced that this market is more about shorts squeezing than chasing leadership?

FIT has a 93% short float ratio, which is rather high and implied that "everybody is short the stock."
This means that the stock probably has no other way to go than up.

Another question: since you are a longer term investor, do you keep positions through earnings or do you prefer to ease out just before earnings? FITs earrings are still far away, so this is not a question about this stock, but surely, earnings will move the price much, especially with the type of short ratio that we can see.


Pascal

Pascal, the FIT purchase could end up being a long-term holding. It mostly depends on the market. If I am correct that FIT has bottomed, it will likely go up. The risk is small, and the rewards could be great. I usually don't fish down here, but the setup looks right. I ran a screen using FIT as a model (earnings growth, liquid, and has had a sizeable sell-off with a potential bottoming structure) and found these additional candidates: AMAG, VIPS, TWTR, and AKRX. I did not select FIT because of a high short level, rather, the high-volume breakout. My data shows 34 million shares held short with a float of 136.6 million shares (Short Interest Ratio of 25%). High short ratios can put a floor under a stock, but this was not my primary criterion; it could help in the short term.

My rule about earnings: If I do not have a 5% cushion in a position, I exit the day before the earnings release.

Relating to Mr. Market. There are plenty of reasons to think the market could go in either direction. On the downside, some evidence is building for a recession. If so, then we will probably finally get a sizeable correction. Every time I believe the market will tank, however, it moves up again. This sort of resiliency is there for a reason. I expect it central banker action shifting money into the US, and until a recession becomes more obvious I suspect the right side of the market is the long side.

[Sean]

Mike - Are you using any precedents from the 2009 market where a lot of stocks rose up from bottoming formations after steep declines?

[Mike]

Mike - Are you using any precedents from the 2009 market where a lot of stocks rose up from bottoming formations after steep declines?

Sean, I am not making exact precedents. All I am noting is that many high-quality stocks have sold off substantially and now seem to be bottoming. In 2009 junk off the bottom seemed to work better than CANSLIM-style investing. Perhaps quality off of the bottom could work. The problem with bottom fishing is usually overhead supply. When price climbs up into a price region where there has been a significant amount of trading, selling can come into the stock.