With the Dow Jones Industrial Average knocking around at an all-time high, interest rates peaking and the economy slowing a tad, the talk on cocktail party circuit isn't about declining stocks and short selling.
It's just the opposite.
Ask anyone you talk to about short selling and you're likely to get one of the following: (1) it's too hard, (2) you rarely make money, (3) your gains will never taxed as capital gains and (4) it just goes against the natural order of the way we should be doing things.
Plus, (5) they know somebody who ventured onto the "short" side and lost big.
Ask them if they ever sold a stock short and you get a look that says don't ever look at my sister like that again look.
Short selling is a strategy that allows you to profit from a falling market, falling sector or a falling stock.
Shorting is common in virtually every market - options, commodities, futures and currencies - except stocks.
Why? I don' really know.
Every investor knows that in order to be profitable, you must BUY LOW and SELL HIGH.
For the short seller, the same rule applies only in reverse - that is SELL HIGH and BUY LOW.
If you look back in time, some of the most famous people on Wall Street were known for their short selling prowess.
Names that come readily to mind are people like Jesse Livermore, Daniel Drew and Joseph Kennedy (yep - that Kennedy - JFK and Teddy's daddy).
As for the famous ones today, I'm not telling and they aren't either.
The people who make their living shorting stocks full time are held in pretty low esteem by most of the trading public.
Being the litigious society that we are, corporate chiefs have a tendency to go out of their way to make the "shorts" miserable.
As a matter of disclosure, I manage a long/short portfolio and I can be up to 100% long or 100% short.
Have I ever been? No.
I'm happy somewhere in the middle.
I'm not a permanent-bear like many, but I do believe that there is a time and place to be a buyer and a seller of stocks.
So why am I talking about it? When you look at all of the reasons why you shouldn't be shorting stocks AND the fact that very few people ever even consider the strategy - the little voice in the back of my head says that it's high time to take a hard look at it.
From my perch on the trading turret, I see a market that is extremely overbought.
The indicators that I use to measure risk are rising across the board.
This includes both markets and individual sectors.
Plus my favorite indicator (the Bobble-head Indicator) is a flashing yellow light.
This indicator, which is contrary, is something that I developed a few years back.
It measures the attitude of CNBC's "Talking Heads".
The more positive that they are, the more skeptical I become.
When is the time to go short? For those who follow technical analysis, the ideal time to short a market, sector or a stock occurs when the market as a whole is really overbought.
Demand has really pushed up the price level.
It doesn't hurt that Wall Street analysts and the "Talking Heads" are gushing about the market's near-term prospects.
As demand lessens, the upward price action stalls.
At this point, everyone who wants to join the party is "in".
As supply overtakes demand, the price begins to weaken.
The chart pattern reflects this trend shift by rolling over from positive to negative.
The normal course of events is for the price to fall until supply and demand are once again equal.
Index, Sector or Stock? Over the years, I've shorted indexed, sectors and individual stocks and my preference is to short indexes or sectors over individual stocks.
The reason is that it's easier to do so.
My vehicles of choice are Exchange Traded Funds (ETFs) because of their size and their liquidity.
I also like to use inverse mutual funds.
These funds are relatively new and allow you to employ a number of different strategies.
Two fund families currently offer inverse funds: Rydex and Pro Funds.
Both are no-load and low-cost.
In that they are mutual funds, they can be bought and sold in retirement accounts such as IRAs and 401(k)s.
Summary Short Selling is a viable investment strategy and when properly used gives you a way to profit when the markets fall.
Selling short isn't for everyone, but those who take the time to learn more about it, will find it enticing.
Remember, there's not a lot of competition on this side of the market, so in order to be successful, you have to do your own thinking and let the trades come to you - never chase a trade.
Patience and discipline are virtues and in time, all of the right trades will come to you.
Start to day learning how to sell stock shorts so that you can profit tomorrow.
It's just the opposite.
Ask anyone you talk to about short selling and you're likely to get one of the following: (1) it's too hard, (2) you rarely make money, (3) your gains will never taxed as capital gains and (4) it just goes against the natural order of the way we should be doing things.
Plus, (5) they know somebody who ventured onto the "short" side and lost big.
Ask them if they ever sold a stock short and you get a look that says don't ever look at my sister like that again look.
Short selling is a strategy that allows you to profit from a falling market, falling sector or a falling stock.
Shorting is common in virtually every market - options, commodities, futures and currencies - except stocks.
Why? I don' really know.
Every investor knows that in order to be profitable, you must BUY LOW and SELL HIGH.
For the short seller, the same rule applies only in reverse - that is SELL HIGH and BUY LOW.
If you look back in time, some of the most famous people on Wall Street were known for their short selling prowess.
Names that come readily to mind are people like Jesse Livermore, Daniel Drew and Joseph Kennedy (yep - that Kennedy - JFK and Teddy's daddy).
As for the famous ones today, I'm not telling and they aren't either.
The people who make their living shorting stocks full time are held in pretty low esteem by most of the trading public.
Being the litigious society that we are, corporate chiefs have a tendency to go out of their way to make the "shorts" miserable.
As a matter of disclosure, I manage a long/short portfolio and I can be up to 100% long or 100% short.
Have I ever been? No.
I'm happy somewhere in the middle.
I'm not a permanent-bear like many, but I do believe that there is a time and place to be a buyer and a seller of stocks.
So why am I talking about it? When you look at all of the reasons why you shouldn't be shorting stocks AND the fact that very few people ever even consider the strategy - the little voice in the back of my head says that it's high time to take a hard look at it.
From my perch on the trading turret, I see a market that is extremely overbought.
The indicators that I use to measure risk are rising across the board.
This includes both markets and individual sectors.
Plus my favorite indicator (the Bobble-head Indicator) is a flashing yellow light.
This indicator, which is contrary, is something that I developed a few years back.
It measures the attitude of CNBC's "Talking Heads".
The more positive that they are, the more skeptical I become.
When is the time to go short? For those who follow technical analysis, the ideal time to short a market, sector or a stock occurs when the market as a whole is really overbought.
Demand has really pushed up the price level.
It doesn't hurt that Wall Street analysts and the "Talking Heads" are gushing about the market's near-term prospects.
As demand lessens, the upward price action stalls.
At this point, everyone who wants to join the party is "in".
As supply overtakes demand, the price begins to weaken.
The chart pattern reflects this trend shift by rolling over from positive to negative.
The normal course of events is for the price to fall until supply and demand are once again equal.
Index, Sector or Stock? Over the years, I've shorted indexed, sectors and individual stocks and my preference is to short indexes or sectors over individual stocks.
The reason is that it's easier to do so.
My vehicles of choice are Exchange Traded Funds (ETFs) because of their size and their liquidity.
I also like to use inverse mutual funds.
These funds are relatively new and allow you to employ a number of different strategies.
Two fund families currently offer inverse funds: Rydex and Pro Funds.
Both are no-load and low-cost.
In that they are mutual funds, they can be bought and sold in retirement accounts such as IRAs and 401(k)s.
Summary Short Selling is a viable investment strategy and when properly used gives you a way to profit when the markets fall.
Selling short isn't for everyone, but those who take the time to learn more about it, will find it enticing.
Remember, there's not a lot of competition on this side of the market, so in order to be successful, you have to do your own thinking and let the trades come to you - never chase a trade.
Patience and discipline are virtues and in time, all of the right trades will come to you.
Start to day learning how to sell stock shorts so that you can profit tomorrow.
Source...