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Selling Short, Why Not?

In Chip's Newsletter today, he said that he hopes we don't "short things". Is there a post that explains why short selling is a bad idea for an amateur like me?
I know the standard argument is that with a short your losses are potentially without limit, but that's an unlikely risk I'm prepared to take. And is buying the ETF SH when SPY falls not the same as buying SPY when it rises?
Thanks

Best Answers

  • markdmarkd mod
    edited March 2016 Accepted Answer
    Hi @KBC,

    I don't see anything wrong with shorting when the conditions are right, and as you suggest, bearish ETFs take away a lot of the risk because you are not (directly) borrowing shares, so you are not taking some of the added risks and disadvantages of shorting (paying dividends, paying interest, getting the shares called in prematurely).

    I think Chip believes that you make more money on the long side in the long run. The general problems with shorting stocks are, market down trends tend to be shorter in duration, your timing has to be great (or you give back a lot in false starts), and your profit is limited to 100 per cent (if you short a stock at 10, the most you can make is 10 points, whereas if you buy a stock at 10, it can go much higher than 20). This last point is really theoretical if you are a swing trader - you generally won't be holding long enough, whether long or short, to make 100 per cent (except in some low price stocks, like recent energy and materials issues).

    On the other hand, Richard Wyckoff, a speculator from the 30's whose ideas are becoming popular again, argued you must be as willing to go short as long if you want to maximize your returns. I think that's right. But probably you don't want to short when a stock is above its rising 200 day average (unless you can identify final topping action) or after climaxing volume below the falling 200 day average and sellers can't make new lows. In these circumstance, the down legs are usually not long enough to pay your losses (commissions, slippage and distance to stops on premature entries).

    To make shorting worthwhile, you are better off in a down trend. So, if you are shorting, you want to see that buyers cannot keep a stock above broken support (so that the intermediate and long term averages turn down or continue down and prices stay under those averages) then sell the highs until sellers cannot make new lows. In a downtrend, the down legs are longer, and there are fewer false highs to pay for, so you get to keep more of what you make.
  • markdmarkd mod
    edited March 2016 Accepted Answer
    If you go to the home page, there is a "Search Stockcharts" window.

    Enter "chip anderson short selling"

    There is quite a list of entries, some not relevant, but you might find something interesting.

    You might also look through the archive of Saturday videos. Chip usually has something say in those.

Answers

  • I'm also new to SC. For what it's worth I have never bought this meteoric rise of stock prices since 2007. The economy has not recovered and the Fed knows it. What I observe is the market shot up as soon as the Fed said they weren't going to raise rates - that is very short term thinking. Whatever you short, keep a close eye on when you enter and know where you will exit. Keep $SPX in your basket and watch it from Monthly to 5 minutes. The bulls have not given up yet and can ruin a short position.
    Hayden
  • Thanks for your input and advice, much appreciated. I'm hoping someone can direct me to any previous posts that would help me understand why Chip advises to not "short things"
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