There are warning signs and red flags that a stock may be in trouble.
Heavy Institutional Selling
This means that a huge volume is coming in to the downside.
You can see in the chart below that volume is very heavy (to the downside) and the stock is moving lower. The volume is coming in huge and heavy and bringing the stock lower.
This shows that a stock is in trouble. You need to be mindful of your stops – either get out quickly or be prepared to short the stock...
Be very cautious when you start seeing these large volume spikes and the stock is moving lower.
Huge Run in the Stock
A huge run in the stock is the second reason a stock could be in trouble...
Be really cautious if you see a stock flying high. Why would a stock be in trouble if it's moving really high, really fast?
There's always going to be a pullback eventually. Even the big companies who explode and have fantastic growth eventually retrace and pullback.
If you have stock that's going straight up, be cautious because it will have a pullback soon like all the rest. Be mindful of this and always peel into strength and sell into profits as the stock runs up in your favor.
Consistent Quarterly Losses
Quarter after quarter losses that a company is losing which is a huge red flag...
If I'm watching a company's earning and profit reports (at the fundamental level), it would be an issue if the company was constantly losing money. You must be aware of this as a red flag, because the company may eventually go under in stock price, get delisted, or file for bankruptcy.
Be careful if a company has consistent losses, unless they recover quickly. A few bad quarters may not be cause for alarm, but it depends on the history and assets of the company.
Huge Debt on Their Balance Sheet
If the company owes a lot of money, like you may on a credit card, they may get hurt if they don't pay that money back.
You want to be sure their debt is able to be repaid in some form. If they don't repay the debt, the stock could be in danger – it's a warning sign that you need to pay close attention.
Selling Off a Flagship Product
Why is selling a flagship product a no-no?
Let's say I own Apple. I decide to sell the iPhones, iPads, etc. to Samsung, and they are now going to own my products. Since these are the key (flagship) products that my company owns/makes money on, it's a warning sign if my company loses those assets.
You won't see the sign in big letters: "APPLE IS SELLING TO SAMSUNG." But in retrospect, you want to notice these subtle changes in one company selling products to their competitor. They are likely selling key products to competitors because they need the cash ASAP to pay debts...
Big Company Cuts
If a company is cutting jobs and releasing people, the company is being restructured and could be setting up for a downfall.
Think of the General Motors dilemma: before they got delisted off the stock market – they were cutting jobs. They may be cutting departments, the labor force, or even equipment.
It's important to keep a close eye on these kinds of company cuts.
Senior Management Leaves
If a company's senior management leaves the company, you have to ask: Why? Is the company going to survive without them?
Again we'll use the Apple example. If Steve Jobs was alive, what would've happened if he decided to leave Apple as the sales are rising?
There may be an issue with the company if the senior management is being fired, replaced, etc. You must pay attention to the company's restructuring.
Public companies get audited all the time – systematically – by an outside firm to make sure things are in check.
Since all their earnings are public, they have to report earnings to their shareholders.
If a company disagrees with the auditor, the company may bring in a different auditor. Why was there disagreement between the company and the original auditor?
If the company and the auditor agreed on the recordkeeping and books, there shouldn't have been an issue. If an auditor changes, it can be a red flag that the company is having bookkeeping issues.
There are many other red flags to watch for, but this outlines some key principles to watch for and be mindful of. If you notice these red flags, you may want to sell your stock or avoid the stock of the company showing these signs.
Companies like to hide and downplay these occurrences, but watch closely and see how these dangers apply to your activity in the stock market.