"A blow-off top refers to an extremely fast spike up in a stock's price, followed by an extremely fast and severe drop in price."
Why do I want to wait until "an extremely fast and severe drop in price" to short. Seems like shorting in the middle of a blow off top is the best.
I'm not saying Cat is a horrible company. They are doing great as a company. The stock price, however, has gotten way ahead of Cat the company. If the earnings do double in 2 years, that does justify today's price of $92. But that's 2 years from now.
There is no way the current price can be sustained. Especially with union contract negotiations under way. Now that Cat is doing quite well as a company, the union will have better bargaining in asking for more.
I'll short from here down to mid 70's by end of January and middle of Feb. Then I'll buy long and hold for the slow ride up to 100-120 by the end of 2012.
The blowoff top has not occurred yet. The blowoff will likely not occur until the stock price is well north of 100. So while a short now may eventually see a profit, you will be nursing that short position for likely a few months. Simple rule: YOU DON"T SHORT OUT-PERFORMERS....But if you want to gamble....it's your shirt to lose!
It's not as simple as saying "a stock is in an uptrend".
Eventually that uptrend ends. And you can use valution metrics to help determine how close we are to that end.
Start with a basic valution metric of p/e. And for a company like Cat, a p/e below 10 is a screaming buy. A p/e above 20 is a sell (or consider selling).
Of course, you have to take earnings forecast into account to get future p/e.
Well, earnings are predicted to double (and I believe they will) by end of 2012. So the future p/e of Cat, with a current price of $92 comes to about 15. That smacks right in the middle of the fair valuation range.
But that is nearly 2 years from now.
To me, that says the uptrend is nearing an end, and that possible "blow off top" could be right near that top.
I certainly wouldn't want to wait until that blow off top became defined, because by then it is too late to short.