As the painful drawdown from the first quarter of 2025 continued, FS Insight Head of Research Tom Lee began writing about the potential opportunities of stocks that he described as “washed out” or “sold out.” This has led many to ask what it means for a stock to be washed out.

It’s worth noting that Lee is not the one who coined these phrases. He credits noted technical analyst Walter Deemer for that.

A washed out or sold out stock is a stock that has gone beyond oversold, to the point where, as Deemer suggests, there seems to be “no more stock left to sell.” (Colorfully, Deemer compares this to the difference between dry heaving and merely throwing up.)

The term oversold is typically used in reference to a stock that has fallen sharply due to short-term negative sentiment – a stock that has been hit by panic selling or a “Fire-Ready-Aim” overreaction by the market to breaking news. This is often interpreted as a contrarian signal. Technical analysts are wont to use technical momentum indicators such the Relative Strength Index to gauge when a stock reaches oversold territory. 

Lee explicitly views washed out stocks as different from being merely oversold. To assess whether a company is merely oversold or has been sold to the point where there is, for practical purposes, “no more stock left to sell,” Lee looks for stocks that have hit 52-week lows, bounced, and then fallen again, but to a low that is higher than the previous low and with lower trading volume. These arguably represent better opportunity than stocks that are merely oversold.

Take the decline that took place after April 2, 2025, the so-called Liberation Day when President Donald Trump announced tariffs on more than 100 countries. This plummeting took place after months of steady declines. Afterward, Lee identified 32 such washed-out stocks with these five criteria:

1. Current market cap greater than $10 billion
2. Down >30% at least a week before April 8
3. Didn’t make new 52-week low on April 8
4. Daily volume April 8 less than daily volume at 52-week low
5. A high level of short interest – Day-to-Cover Ratio > 2^*

^* The day-to-cover ratio estimates the time it would take for short sellers to buy back the shares they had borrowed, based on the stock’s average daily trading volume. A day-to-cover ratio of 2 or higher  (i.e., the number of shares sold short is at least double the stock’s average daily trading volume) is typically seen as indicating heavy betting against the security being discussed.