What should you do if a stock you are holding goes up 50% in one day? Yesterday night at 5:30 I found myself contemplating this happy question on ARTX (Aerotech, Corporation), which had gone up 50% on news of a large order from the U.S. Department of Defense. So, I did what I usually do when confronted with such questions — I used Equities Lab to get an answer.
How to ask the question? I chose the most naive query possible: “Find me all stocks that have gone up at least 40% in just one day”, and then backtested it, rebalancing weekly on Mondays?
That doesn’t look good! Maybe I have micro cap stocks (even smaller than ARTX’s 80 million) mucking up the result. Or perhaps penny stocks are causing the problem… Either way, I realized I was going to have to investigate further — a possiblity at a 200% gain (.5 to 1.5 in 2010) did not make up for the loss of everything thereafter. And given that my rebalance period was only a week, such losses seemed to come promptly. So I put in rules to rule out closing price below 2 dollars, and market cap less than 40 million, and got ….
Decidedly not an improvement! It was 5:40pm now — if I didn’t come to a decision soon, I would not be able to unload my ARTX even in the after hours market. But could crossing $5 dollars have made the difference? And what about before 2010? Lets see what I saw next….
Wow! I could sell short with this! No major updrafts, at least not when compared with the relentless downward trend… Going back in time we have:
Fine! lets try the entire time period…
So, thanks to ARTX, Equities Lab now as a short screener that can turn a dollar into less than a penny in 10 years. Shorting is a dangerous strategy, but I had all the data I needed to go ahead and unload my shares of ARTX.
UPDATE: I only managed to unload 90% of them — but that should shield me from the worst of the imagined future declines. I still think the company has huge potential, and may well buy back in after it goes back down some from its spike yesterday (more backtesting to do). And I still think that the “Estimates Fun Top 10” screen is a fine screen. It is not its fault that ARTX had the bad manners to go up 50% in one day. OK, maybe it is…
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Aerotech (ARTX) prices: 20140324 $4.14, 20140325 $6.25, 20160825 $2.79. So, great one day gain is followed by poor performance. Great analysis.
A similar effect can be seen using 4 week lookback. Difficult to implement as a short screen, but stop-gain orders could be used. Doesn’t happen enough to affect overall screen results much though. But if you happen to hold a stock with a very large 4 week return, and notice the increase with little effort, it is probably safe to sell.