Head Old Stock

Stocks up and they go down, and to totally ignore 50% of the game is silly

For anyone who has ever wondered about selling short, this is going to be interesting to you. There are two sides to every coin and there is a yes and a no in everyday life, the yin and yang, for every force their is a reaction etc. Well in the market there are two directions also. Up and down. For every stock you want to unload there has to be someone on the other side who wants to buy it. It is an eternal "tug of war" that goes on and it has been said the market is the great "equalizer". That means that no matter how far out of whack something gets, the collective intelligence of the masses will bring it back into "center". For the most part that is very true and the reason that the market will never ever go straight up or straight down. Obviously, either one would be an "extreme", and the market rights those extremes.

The fact is that stocks up and they go down, and to totally ignore 50% of the game is, well, silly. By now you all must realize that a stock's movement is influenced more by the overall market tone than its fundamentals on a day to day basis. By that we mean even the best of the best will pull back if the NASDAQ is tanking. So, when we feel the market is ripe for a pullback, common sense should tell you it's time to get out of being "long" and get ready to go short (or sit out the action). We won't personally take a long position in anything if we feel the overall market is heading south. Likewise we won't short anything if we feel the trend is "up".

The old saying "you can't fight the tape" comes into play here, and it is as old as the 20's when they were using tickertape machines. If the market is sliding, your stock probably is too. The next thing about shorting a stock is that we are in a whole different ballgame when it comes to what a company will do about sagging stock prices. Times have certainly changed folks, just a mere ten years ago, stock prices were the furthest things from people minds. But as the market became a national pastime, people started demanding answers from compay CEO's. They wanted to know about the business end of things and they wanted to know NOW! Then it didn't take long for lawyers to see a whole new revenue stream. When a company's share price starts to fall, get a group of people together and sue them! A classic class action suit. So, companies responded to the "new" pressure by doing everything they could do to bolster up their share price and that lead to some interesting "developments".

Let's say your company is going to miss earnings this quarter. What better time to announce a 2 for 1 split and hope the excitement of the split hikes the disappointing numbers? Or suppose your stock price is simply sagging for lack of recent developments? Why not do a series of releases telling about the new "China contracts?" See the point? We are in a market where information is instantaneous and reactions to it can be severe. This makes short selling a lot "riskier" than going long. A company wouldn't release bad news to stop a rising stock, but they will run to the microphone to scream about a "new" initiative if their share price sags.

So the biggest risk today isn't the old adage that your "risk is unlimited" when you short a stock, today the biggest risk is a good PR department that is designed to get share prices moving, and cover up "bad" news. If you were running the XYZ company and you were getting phone calls from shareholders screaming about why the stock has gone from 50 to 30 in a good market, do you think you would "do something about it?" Maybe put out a press release about how you were "in talks with MSFT about a new product?" Even tough the only talks you had were with the buying department there as you tried to sell them something!

The point being, companies are very aware of their share price now and will indeed do things to keep them from sagging. By the way, the old adage is this: If you buy a stock at 50 bucks and it goes bankrupt, all you could theoretically lose is your 50 bucks. So going long means you can only lose what the stock costs. But if you short a stock at 50 bucks, it has virtually no "top" (theoretically) and could go to 25,000 or more. Naturally that is a severe exaggeration, but the concept is sound.

To wrap this up for today, remember we do indeed "go short" at times, but we don't put a lot of research into specific companies to find them. When we feel the market is going to pull back, we simplylook at who was weak when it was moving up, because they will fall more when its falling. Then we look at the real highflyers, because the ones that run up the fastest, fall the fastest when the market goes sour. But more importantly than any of that is we do NOT like to hold short sales for more than a couple days. Along with the chance the market will bounce and take them back up, the company itself will be trying to turn things around too.

The only time its wise to hold a short sale is after a huge sustained run up in an average. For instance if the NASDAQ went from 1500 to 3000, when the selling finally hits it is probable it will last for awhile and you could hold on to a short sale. Other than that though, very short term short sales are your best bet.

About the Author

Stocks2Watch Trading Tips

http://stocks2watchtradingtips.blogspot.com/

Head Old Stock

Comments are closed.