Green Mountain Coffee Roasters is Running Out of Steam

Mountain Coffee Roasters (NASDAQ: GMCR) boosted its stake in the company by 36%. And while this was enough to rustle the jimmies of short sellers who had been lulled into complacency by GMCR’s now-year long bear market, it remains to be seen whether or not investors will be willing to turn Green Mountain’s September bounce into a renewed bull market.

The thumbs-up from Luigi Lavazza SpA noted above is only a part of the newly-bullish story behind GMCR. Green Mountain Coffee Roasters has also benefitted from a new product rollout (“Wellness Brewed Beverages”), and bullish commentary from a Lazard Capital analyst who, in initiating coverage of the stock, debuted with a Venti-sized price target of $39 per share (GMCR is currently trading at a 22% discount to that price target.)

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Closing higher for a third day in a row heading into Tuesday’s trading, shares of Green Mountain Coffee Roasters look increasingly vulnerable to a near-term reversal lower. GMCR has been toiling away in bear market territory since the fall of 2011, reaching a low just north of $17 in the second half of July. Recent strength in the stock suggests strongly that the short sellers have begun to relent, covering positions and sending GMCR higher in the kind of spiking price action that typically accompanies short-covering rallies.

For those looking to get a piece of Green Mountain Coffee Roasters, waiting for the stock to settle down somewhat is fairly obvious good sense. Buying near-term overbought markets is risky enough, buying near-term overbought markets that are still buried beneath their long-term trends is all the more problematic.

Why? Because statistics show that overbought markets have a tendency to underperform in the near term, and this tendency is even more pronounced with markets that have been trending lower. In the case of Green Mountain Coffee Roasters, while the short-covering trade may keep the stock aloft for awhile, the potential for the stock to reverse lower is significant enough that traders who want to add GMCR to their portfolios – as a buy or a rental – almost certainly will be better off in waiting for the stock to simmer down.

From: forbes.com