All you need to know about DEATH-stocks...
Death stocks are not funeral or mortality stocks.
Death stocks are those who aquire that odious designation through meeting 3 hurdles.
Longs should avoid them like the plage and shorts may find them profitable. If you own a stock that goes D on you...it should be considered for sale.
What three hurdles does a stock have to jump to aquire the rare and putrid D stock designation?
1. Sudden sizeable % drop in price
[quite often an opening gap down]
2. High volume accompanying the sudden price gap down.
the higher, the better
3. News.
News the market obviously does not like. You may disagree with the markets reaction to the news...Doesn't matter.
It is our experience that the next major swing trade move in stocks after they go D is DOWN about 75 to 80% of the time.
It's probaby the highest % probability chart pattern we know of.
D stocks fool value buyers and amateurs.
Lets say XYZ stock has been going sideways to slightly down for 2 mo. XYZ company reports bad news and the stock opens gap down $4 to $38 on 4 X normal volume.
Value buyers rush in thinking..."Gee, it's a 10% off sale, what a deal. If it was good yesterday at $42...it's even better at $38".
Wrong, Wrong, Wrong and...........Wrong.
The stock went D at $38.
It may dead cat bounce up a little bit or may not at all but the next swing trade move in that stock AFTER it went D at $38 is Down abut 75 to 80% of the time.
We aqainted C.R. with the Death stock concept a couple of years ago and he can vouch for it's effectiveness.
D stocks are very easy to pick out when looking at a chart.
The big volume bar, the stepped in post hole look on their face. Then you look to make sure it was caused by news. Normally it was. The best news to rely on is unexpected bad earnings or a pre announcement of bad earnings. But...it can also be other news.
These stocks are dead meat and will only putrify in the markets embrace.
The skankiest D stocks are those who's charts were already trending down before they went D. They already showed poor relative strength vs. the market and their accumulation/distribution numbers were already poor. [Easily checked through IBD which IOHO, is a must subcribe to service].
[If you know what to look for, you can also get a good feel for the accum/dist just by looking at the chart. IBD hard numbers are best though].
D stock action is most predictable in an overall market environment that is neutral or declining. Of course, that's just common sense.
It will also work in an overall market environment that is rising...just not as dramatically.
Do not be lulled into false security thinking that you can wade into a Death stock when it goes D just because the overall market environment is strong. Do not think it no big deal if you own a stock and it goes D in an overall market environment that is strong.
For your stock has just entered...the death zone.
Eventually most stocks move out of D designation.
We have seen many though, go D and then go D again a few months later. Washington Mutual and many of the financials did this in 2008 on their trip to hell. Value buyers unaware of the D trap got crucified. Just knowing about the trading rules of D stocks could have saved them a fortune.
We know of a trader that bought when they went D even though we aquainted him with the D stock rule. He ended up riding the stock to low single digits on succesively lower buys while it was on Death Row.
If we write that book, there will be a whole chapter on D
stocks.
Next in the series of trader articles will be...W stocks.
A subject with a much happier ending...for longs.
Fabian
Dislclaimer:
We are not a financial advisor. We have made our living from the markets for 29 years, the first 9 in the industry helping clients.
We "retired" at 40 and manage only our own accounts since then. The above is our opinion and is not trading advice for you or anyone else.
Do your own DD and make your own decisions.
Why can't every post on I-Hub or S.I. contain a standard boilerplate disclaimer pre printed?
AI
