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Short-Selling with the O'Neil Disciples: Turn to the Dark Side of Trading by Chris Kacher, Gil Morales

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CHAPTER 6

Case Study #2: Netflix (NFLX) in 2011

There are few stocks in market history that have confounded short-sellers as much as Netflix (NFLX) did in the post-financial crisis bull market that developed off the lows of 2009. As we discussed in Chapter 1, NFLX was a frequent target of high-profile hedge fund short-sellers, several of whom found it necessary to pump their short position by appearing on financial cable TV and writing articles on financial websites detailing why NFLX was atrociously “overvalued.” Such short-sellers were what we call valuation short-sellers who short a stock based on the idea that a) the stock is overvalued and b) the stock market doesn't know this, but they, in their preeminent prescience, do. In our view, arguing with the market, as much as on the long side as the short side, can have disastrous results, and the steady, albeit choppy, upside trend of NFLX shown in Figure 6.1 attests to this.

Had these persistent shorts been more attuned to listening to the market instead of telling it what to do, they could have just waited until NFLX finally showed signs of topping in mid-2011. After a strong surge to the upside that slowed down in April 2010, NFLX continued to chop its way higher. Each time it broke out of a short base it ran up a short way and then pulled right back to the top of the prior base. This was a fairly consistent pattern for NFLX all the way up until the stock finally began to show a change of character in mid-2011. The primary ...

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