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SHORT SQUEEZE


Is Newell Rubbermaid Set To Bounce?

12/21/07 10:16:06 AM
by Matt Blackman

Stocks have turned more bearish of late, but one thing is clear. No matter what else is happening in markets, the probability for a rally is higher as Christmas approaches. Here is one stock that has the potential to move ahead of the pack should Santa make a Wall Street stop this year.

Security:   NWL
Position:   Accumulate

Second to January and only by a hair, December is the strongest month of the year posting an average monthly 1.4% gain over the last century. Part of the reason for a strong last-month performance is the Christmas rally. Over the last 110 years, the 17-day period between December 21 and January 7 has been responsible for more than 40% of the yearly Dow gains.

But as markets have turned more bearish, short-sellers have sprung from the woodwork like a plague of termites intent on devouring the profits of those long positions patiently awaiting the Santa Claus rally, causing many to question whether this year will be different.

Shorts borrow a stock and sell it in the hopes that the price will drop so they can buy it back and keep the difference as profit. In a challenging market they can make like bandits. (See Figure 1.)


FIGURE 1: NWL. Here's a squeeze trigger at $25.01 with trendline support (blue line).
Graphic provided by: OmniTrader.com.
 
But there is a situation for which the long positions eagerly await. It occurs when too many shorts have piled into a stock that for one reason or another starts to rally with a vengeance. When that happens, shorts must join the race to buy back stock to cover their positions, and this has the potential to push stock price into the stratosphere and squeeze the shorts in the process — hence the name "short squeeze."

This looks to be the situation with consumer and commercial home product manufacturer Newell Rubbermaid (NWL) just as the Santa rally is scheduled to arrive. So it could not have been better timing when the market learned that NWL had crossed above its squeeze trigger threshold or the average price at which the shorts entered their positions.


Why is this important? A squeeze trigger is the short-squeeze "line in the sand" that tells the market that the shorts will be increasingly motivated to buy stock to exit positions as the stock rallies. And the faster it rallies, the more powerful this motivating force is. On December 18, Buyins.net issued a press release to 2,500 wire service outlets announcing that the squeeze trigger for Newell Rubbermaid of $25.02 had been crossed and there were a total of 10,432,200 shares sold short (3.8% of the float), which as of on December 18 would cost shorts more than $260 million to cover.

FIGURE 2: NWL. This chart shows fundamentals, including rising earnings per share (EPS), relative value (RV), and relative timing (RT) near the previous low plus the squeeze trigger and historic support near $25. Note that last year each time NWL has touched or moved below $25 (green arrows), a rebound has followed.
Graphic provided by: VectorVest.com.
 
That is a lot of buying, but what is more compelling from a technical standpoint is that $25 also represents a significant support level that has held up very well in the last four times it was hit.

Fundamentals for this company are also positive. As we see from Figure 2, earnings per share (EPS), the earning growth rate, sales and relative (forecasted) value (RV) are also rising and the relative timing oscillator (RT) is in an area that has presaged rallies in the past. The current growth to P/E ratio (GPE) of 0.95 is also quite respectable, given current interest rates (at current interest rates, a value above 0.35 is considered good).


If the market continues to rally, Rubbermaid looks to be one company that is not only set to rally but has the fundamentals in place to support the move.



Matt Blackman

Matt Blackman is a full-time technical and financial writer and trader. He produces corporate and financial newsletters, and assists clients in getting published in the mainstream media. He is the host of TradeSystemGuru.com. Matt has earned the Chartered Market Technician (CMT) designation. Find out what stocks and futures Matt is watching on Twitter at www.twitter.com/RatioTrade

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Date: 12/23/07Rank: 5Comment: 
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