Trading The Trend (long And Short) – Foxtons And Royal Mail

Shorting is a contentious issue in the investing community. Many view it as evil, and others view it as a necessary balance in the market. After all, if everyone was only allowed to go long – then who would keep rampant bulls in check? And that is exactly why China is taking steps to limit short selling today on February 3. Whether that continues after this is currently unknown.

But many investors use shorting to hedge risk, and I believe it allows a certain fairness in the market, with other people being allowed to take the opposite side of trades.

Whilst I certainly don’t agree with a broker’s market making desk shorting the stock and then having the same broker offering the company money in an attempt to close that same short position (value destruction), shorting is healthy (despite one prominent CEO on Twitter calling for it to be banned). It will certainly be interesting to see the outcome of China’s experiment.

Foxtons

Foxtons is an estate agent which has had a rough fall since initially rising from its IPO. The price almost reached 400p, and then steadily crumbed for a multi-year period, before appearing to put in a low just below 50p.

It’s a stock that – alongside Countrywide – has been the attraction of many shorters (myself included). Revenues were down 4% year-on-year in the recent trading statement, but the company no longer looks like it is going to be in extreme difficulty.

This may be the reason for the recent rise.

Or it may not be. It still looks like a low quality business to me, but looking at the chart we saw volumes in the stock increase in July as the stock put in its recent lowest low. The only reason volumes could’ve increased is if buying interest was sufficiently there to clear the sellers and push the stock upwards.

Since the start of September, volume has also been increasing and the stock took out its recent high, with a breakout on good volume. The stock is holding that level, and so I intend to start watching Level 2 closer here. Is the stock well bid? Are there consistent icebergs reloading any AT sells? Even without Level 2, the…