3 Stocks About to Make a Recovery

What if we told you that there was a way to find stocks that the market had already sold, ahead of a pullback. Wouldn’t it make sense to buy these “pre-sold” companies when the market pulled back as they’re the stocks likely to rally earlier? Our data says yes. The market made a dramatic pullback on Tuesday, thanks to international tensions over the developments in North Korea and South Korea, Ireland’s bailout from the EU, with Portugal and Spain possibly next, and the Fed’s lowered economic forecast. The pre-holiday jitters have stocks trading to key support level as the S&P 500 Index is now hovering around the 1,175 level that provided support a week or so ago. So, you’re asking, where should I be buying if everyone is now selling? How about the companies that investors have been “pre-selling” during the rally? What I’m referring to are the companies that have seen an increase in short interest activity. Short sales represent the bearish bets that investors make by selling stock that they’ve borrowed on margin with the plan to buy the shares back at a lower price in the future to satisfy the liability of the shares they sold earlier. We use the term “pre-sold” when referring to companies that have seen a rise in short interest while their share prices have trended higher. Our goal? To find technically strong stocks that have been extensively “pre-sold.” This provides us with a list of strong bounce candidates when the market finally sees a correction, as it is seeing now. The table below displays some of the top results of our latest “pre-sold” model, which evaluates more than 7,000 companies daily for signs of healthy bounce-back potential. According to our work, the stocks on this list are more likely to post a strong recovery from the selling pressure that has pulled stocks lower. Among the list are a few companies that have caught our attention as bullish candidates that are worthy of leveraging with call options. Rackspace Hosting, Inc. (NYSE: RAX ) This is one of the cloud computing companies that investors have been so excited about. Short sellers have pre-sold the stock, despite the fact that RAX posted fundamentally strong results and remains in a strong technical uptrend.  We like the opportunity to get into these shares on a pullback to the $27 level before the shorts start covering their positions. Williams-Sonoma, Inc. (NYSE: WSM ) High-end retail continues to rule the holiday season, and you have to consider a store that sells turkey roasting pans for $300 high end. The stock dropped from $36 to $32 last week after its earnings report, but the stock’s short interest ratio of 7.4 suggests that it had been pre-sold before that report hit the wire. We would consider the current price of around $32 to be an opportunity to jump back into this retail play. Aruba Networks, Inc. (NASDAQ: ARUN ) Another cloud computing play, ARUN has been on a tear after a positive earnings report last week. The stock is pulled back Tuesday, retracing back to $23. We took the opportunity to close out a winning trade on this company today in our Winning Edge service , but we’re looking for an opportunity to get into this pre-sold stock before the shorts start to cover their positions by buying the stock. Consider $21.50 a great entry price for a bullish call position on this popular cloud company.
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