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A
pro recently joked the bear market will end when Joe Sixpack
quits his job so he can sell short for a living. Of course, it
was Joe who led the charge in the bull's final days, and got his
head handed to him for the effort. In other words, it will be
time to go long in a big way when the public finally gets around
to selling short.
Short selling is the hottest game in town these
days, for obvious reasons. But it's still not easy
to make money selling first, and buying later. In
fact, most of us can look at plummeting charts for
hours, and still jump in at exactly the wrong time.
This is one of the great truths of short selling.
Let's examine 10 common pitfalls of this classic
trading
strategy. After you review this
list, you'll understand why the practice can
cause so much pain. Keep in mind the bear
environment actually makes short selling more
difficult at times, because the market loves to
punish the majority.
1. Choppy Sloppy -- This bear market shows tremendous
overlap in daily price range for
equities
and indices. In other words, pick out today's
high and low for a particular instrument, and tomorrow's
market will probably trade through a portion of that
range. Why is this a problem for short sellers? It
undermines logical stop placement, and makes good entry
prices harder to find.
2. Duck, Duck, Duck, Goose -- Price doesn't go anywhere
most of the time, even in a bear market. The real
declines tend to occur quickly, and in sudden bursts.
This means you need to wait around for a seller's market
to tap you on the shoulder, and/or get burned because
your timing isn't perfect.
3. Too Many Bozos on This Bus -- Short selling makes a
terrible group sport. Many
stocks carry high short interest and
attract frequent squeezes, regardless of how rotten the
chart looks. And you're the most exposed playing the
same
tech
stocks as everyone else.
4. Misguided Missiles -- So you think you're a wizard
when it comes to resistance levels? Well, think again,
Merlin. Support-resistance is three-dimensional, and
price often goes further than you expect, up and down.
This means you'll find yourself shorting into bear
rallies that keep on going up, and up, and up. Until you
give up and cover.
5. Tummy Bumpers -- Short sellers are their own worst
enemies, and your stomach is the culprit. It twists and
turns when it sees your
short-sale tick up, one penny at a time.
This particular agony is not the same as watching an
investment take a dive. Our sense of
gravity helps us rationalize those events a whole lot
better.
6. Monkey See, Monkey Die -- It's often too late to sell
short by the time you see a selloff gather steam. Those
shorting from higher levels are already looking to cover
by the time you think it's safe to sell short. They add
buying power to the market when they close their
positions. That's why you'll sell the bottom, and get
crushed on a short squeeze.
7. Fear of Fleckenstein -- Sure it's the end of the
world, but how does the chart look? You may hate a
company and think it's going to hell, but you're going
to lose money if the chart doesn't agree with you. You
can't turn a profit by selling stories short. You need a
stock to do that.
8. Tom and Jerry -- That cheese sure looks appetizing,
but did you notice the spring-loaded mousetrap? The most
obvious selling spots routinely trigger the most violent
squeezes. This forces us to find the less-traveled path
if we're serious about selling the market.
9. The Unbear Market -- This is a bear market, right?
You may not be so sure if you look at the weekly charts.
Many stocks and futures have gone sideways for the last
9 months, not straight down. This indicates a balance of
buying and selling power, rather than a one-sided rout.
10. Calendar Cramps -- Short sale profits depend on the
time of the month. Positions entered around option
expiration get burned because of all the put/call
unwinding. And buying power can surge near month's end,
especially during window-dressing season. This can make
a falling market float like a butterfly for a week or
two
