Spotting Shorts Among January's Sinkers

January capital inflows lifted a boatload of stocks that had underperformed in 2005. Of course this time of year is well-known for reviving companies held back by weak earnings, outdated paradigms or poor execution.

But not all stocks benefited from January liquidity. At the bottom of the heap lie a handful of sectors that fell apart, while the broad indices jumped to multiyear highs. Let's identify these losers and see why they failed during one of the strongest months of the year.

Money flow is strong and speculative interest is very high in January. That's a potent combination that should overcome a bucketful of past sins. So the failure to attract investment during this period may point to serious problems not reflected in the shrinking stock prices.

Do these groups offer a good list of short plays for 2006? You bet they do, with one caveat.

Stocks that dropped vertically in January probably need to wobble around for a while before breaking last month's lows. Patient short-sellers will respect this oversold condition and hold back their orders until the time is right.

Meat products top the list of January decliners, even though our overweight citizenry still eats tons of red and white meat. Two companies did most of the damage in this sector: Pilgrim's Pride (PPC - commentary - Cramer's Take) and Tyson Foods (TSN - commentary - Cramer's Take). Meat and poultry has been taking a beating in recent months, because avian flu paranoia and beef import restrictions are spreading around the globe.

While the West has been spared from the growing epidemic, worries about disease-carrying chickens is unlikely to abate anytime in the near future. On the flip side, biotech companies such as Biocryst Pharmaceuticals (BCRX - commentary - Cramer's Take) are rising exponentially as they race to find treatments for the perilous disease.

Is airwave-driven radio broadcasting on its way to extinction? Yes, I think is. Modern consumers have so many ways to get information and music that analog-driven radio shows are slowly losing their 80-year customer base, and it will only get worse.

Notably, satellite radio isn't doing much better than its analog cousin. In fact, media jock Howard Stern has done little to help the industry, despite all the hype. Both major players, Sirius (SIRI - commentary - Cramer's Take) and XM Satellite Radio (XMSR - commentary - Cramer's Take), are crawling near 52-week lows after substantial January selloffs.

Most of the decline in the rubber and plastics sector came on the last day of the month. Blue-chip component Goodyear Tire and Rubber (GT - commentary - Cramer's Take) got its clock cleaned after a poor response to fourth-quarter earnings. The good news for short-sellers is that this selloff isn't oversold yet, and it could follow though to the downside quickly.

But the best short positions won't come until the stock trades under that blue line at $14. That points to a three-year trendline that will attract buying interest until it's broken. So unless you're looking for quick profits, stand aside and wait for price to pierce that support level.

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Alan Farley is a professional trader and author of The Master Swing Trader. Farley also runs a Web site called HardRightEdge.com, an online resource for trading education, technical analysis and short-term investment strategies. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Farley appreciates your feedback; click here to send him an email. Also, click here to sign up for Farley's premium subscription product The Daily Swing Trade brought to you exclusively by TheStreet.com.

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