A powerful shorting strategy for the week

If you follow the daily movements of equities, you are often confronted with the case of the price of any given stock rising rapidly. In some of these instances you think to yourself, '...there's no reason for this rise, I know it is going to come back down...' In many cases it does come down, and you wish you had shorted when you had the chance. If only you had a good metric to REALLY know when this move was unjustified and were not forced  to act just on instinct.

Well, you're in luck because I'm going to give you just THAT.

In one of my earlier posts, I gave you the equation for my Share Strength Indicator (SSI), a measure of how much a single share could move the stock price.

http://thequantinvestor.blogspot.com/2011/03/share-strength-indicator-how-much-bang.html

Here, I stated how a high share strength was an indicator that a stock was susceptible to manipulation or uncharacteristically large moves. To test this, lets look at a strategy of shorting stocks that are UP on HIGH share strength. We will short a stock with:

1. A stock price being 10% or more above its 20 DMA price. 


2. A high share strength defined as 20 DMA share strength being greater than 2 standard deviations above the past year's average 20 DMA share strength.

And for the results....

Here we wait 20 days till we cover our short position, and for the results over the past 4 years...

Market          Price Change       Stocks Meeting Criteria
NYSE                 93% (-7%)                       1980
Nasdaq               94% (-6%)                       1272
AMEX                82% (-18%)                       30


Scatter plot of returns for NYSE shorted stocks.

As you can see, once again we have impressive results. If the past 4 years are any indicator, a high share strength along with a big price increase makes for a good time to get in on the short side.