We discovered some interesting themes during our latest algorithmic scans on over 1,000 stocks, translating in to 2 trades which have been added to the trade tracker{.broken_link}:

1)  Strong Sell signals on Oil Companies:  Last night we tweeted an observation that oil companies should be sold, and Oil should start to slide.   Oil futures did tumble in today’s session and according to our algorithm, further downside is expected.  WTI Crude oil current has a risk premium attached due to Russia/Ukraine tensions, however fundamentally there is no significant reason why crude should be trading at these levels.

The Algorithm picked up a strong Sell signal on Enerplus Corporation (NYSE:ERF) – this is the same company we signaled on March 24 for a 1.5% gain to the upside.    We like this Short trade for the following reasons:

a) The company has a relatively high Dividend (4%) but is also highly priced, trading at 52 week highs with a blow-off technical top.

b) Company is based in Canada, whose stock market has been inversely correlated to Canadian dollar strength.  Since further upside is expected in the Canadian dollar, this should be negative for the overall Canadian equity market, including this company.

c)  Natural Gas fading:   Nat gas as been trading in a range since spiking over the winter, with further downside expected as a result of seasonality bias (bull typically ends in April).   A good portion of this company’s revenues are from Nat gas production and are exposed to this possible shift in trend.

Enerplus (NYSE:ERF)

2) Defensive Rotation:   For the past week as the S&P 500 sold off, our Weighted Momentum indicator{.broken_link} showed that the Basic Materials sector was getting a lift on both the up and down days.  These contain companies such as potash producers and miners which should fare well in an inflationary environment (as per our post How To Play A Sideways Market).  The immediate reaction during sell offs is to rotate into such defensive sectors, and we expect this to continue into May.

Compass Minerals (NYSE:CMP) has been on a strong upward trend this year and is currently trading in the middle of an up channel.  The algorithm will buy this at the open tomorrow, however buy-stop orders should be placed at yesterday’s high of 57.06 for confirmation of trend.  An alternative trade would be Rio Tinto (RIO), however the algorithm favours CMP over RIO.

Compass Minerals (NYSE:CMP)

A note about the sell-off in Momentum Stocks:

Market sentiment is clearly turning negative toward ‘growth’ stocks without earnings which have had tremendous gains in the past year.  Stocks such as YELP, TSLA, and FB, which have confounded short sellers in 2013,  have experienced double-digit drops in price just in the past 2 weeks.

The opportunities to short these stocks is tempting.  YELP for example is at the bottom of the totem pole on the Advertising dollars food chain, but they are not profitable at all and the market believes they deserve a $4 billion market capitalization.

Another company that caught out eye is LIVE – a Groupon clone.  This company is also not profitable and are only active in a few cities in America, but their valuation is 27 times their current share price.   This particular stock has dropped so much so fast that the exchange slapped a short sale restriction on the stock to prevent it from going to zero.

Given the numerous sell signals we’ve seen on the S&P 500 and in our universe of 3000 stocks, it is clear the short sellers are in control and they have plenty of ammunition in the form of naked short positions.    As tempting as it is to join the party, the conditions under which these stocks are being short will likely induce volatile swings back up to test recent levels as many of the shorts cover.  We are keeping and eye on these and include these in our algorithmic scans – once attractive opportunities present themselves we will add these to the higher risk trade tracker.