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Hunt for Green October



Seasonality turns negative for the market averages this month. Stock prices from August to October are rarely a "green" experience overall. It won't be hard to find candidates for profitable short sales if the market starts to sink. The challenge will be to determine which stocks on the long side have the best odds of superior performance in Q3.

The market may or may not follow the seasonal cycle down into October. One cannot know about such things ahead of time. We do know that the seasonal danger is there. Our tactic now is to determine with which stocks to "ride the river" on the long side. Very specific selection is the key, which requires a blend of sentiment, price relative strength and seasonality factors.

Technology issues have been having some success lately, so let's examine their potential in Q3:

Electronic technology is currently ranked 7th out of 18 sectors. Short intensity has been heavy, but rising prices have forced many of the short sellers to cover. The percentage of Type 1 short squeezes has fallen off sharply (see green line in chart above.) Nevertheless, there is enough short interest to spur further price-boosting short squeezes. The problem is one of seasonality, which except for a secondary peak late in August, is negative into October. Therefore, technology doesn't offer the best odds for bulls at this time.

There will always be issues that buck the technical factors of their sector or groups. In technology, AMZN is a good example:

AMZN sports the squeeze play positives of heavy short interest and strengthening price action. More importantly, its seasonality is positive starting in early August through October.

Instead of trying to find the exceptions to group and sector rules, we will concentrate our selection tactics as follows:

We select from our top 20 (out of 139) industry groups those groups that have positive seasonality through October. We then focus on those issues that are currently Type 1, short squeeze candidates. Below are charts of some of the industry groups that are in the top 20, and they have elevated short intensity, good price action and a greater percentage of Type 1s, short squeezes underway than Type 4s, long squeezes. Moreover, each of these groups have benign-to-positive seasonal tendencies during the next three months:

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No positions in stocks mentioned.

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