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