If I am anticipating a market correction and would like to prepare a list of short candidates, how do I go about it? One line of reasoning is that one should focus on stocks that were weak during the previous Up leg. because they could not rise fast during the bull leg, they should drop more than an average stock during the coming bear leg. Another line of reasoning is that one should short the recently super-strong stocks because they likely got much more away from their FV during the bull hype and will drop more than an average stock during the bear leg. Which one is correct? I realize that none of the above is a possibility. in other words, one can't predict from the previous strength. Are there any studies published that address the above Qs?
I am not sure on trading this on a longer term. But on an intraday basis, I always short the weak stocks compared to SPY. (e.g. GS, AAPL, RIMM). If I see SPY moving up and AAPL is very sluggish, and not moving up much, I would wait until I think SPY would top out and is about to reverse then I short AAPL to scalp 50 cents or so.
It's hard to tell but like Bolimomo I wouldn't trade this for a longer time...better for a short period..