Bears Ground Continental Airlines

Shorting stocks during such a volatile environment can be a bit nerve-racking.

After all, we fear getting caught in a short squeeze if the market suddenly explodes -- like Wednesday. But we also realize that having some hedges in a portfolio can really help mitigate the damage of a severe market downturn.

The market is experiencing persistent buying interest these days. Now, the bears can quibble with me about whether the action shows "persistent buying interest," but when equities are supposed to be falling because of rising bond yields -- but don't? The only reason that happens is because of, well, persistent buying interest!

With all three major averages up well over 1% yesterday, the best short candidates tend to be those stocks that did not participate in the rally. After all, if they weren't being bought during the feeding frenzy, what happens when all the bellies are full?

One stock that meets this criterion is Continental Airlines (CAL Quote).

I featured this stock a few months ago when it was trading at $37.95. Even though the stock traded lower, it ultimately triggered the buy-stop for a very small loss. Of course, I got the obligatory email from one or two fellows who took issue with my short idea, chastising me, "How dare you short my airline! Don't you know..."

Well, yes, I do know... But so does the market. In fact, the market knows a lot more than I or most other investors do; and according to the chart below, the market is not booking flights on Continental Airlines.

Let's take a look.

Between the September 2005 low of below $10 and the January 2007 high, the airliner's shares have advanced more than 500% on increasing volume. But if you look at the volume bars over the past six months or so, most of the heavy volume has occurred during distribution weeks, with advancing weeks occurring on noticeably lighter volume.

Continental Airlines (CAL) -- Weekly