Why You Should Never Short Stocks



If you want to be a winning trader,  you should never short-sell stocks EVER!  I know it seems shorting is very lucrative as stocks go up at a slow pace, but it takes a split second to plunge; that is why shorting is an art and timing is everything (unfortunately timing often is random).

People tend to short stocks for the reasons listed below:
  1.  You think the stock is overvalued. 
  2.  You think the stock went up too fast.
  3.  A famous short-seller put out a short-seller report (i.e. the stock is fraudulent)
There are several approaches to shorting, one is doing the fundamental "short", where the trader in question has spreadsheets and their model shows the stock is severely overvalued based on earnings, growth, debts, etc. 

Another approach is to short based on technical analysis, where your technical analysis has determined the stock is in a downtrend. 

There are issues with both approaches, the first is the Market no longer runs on P/E ratios. Ever since the technology renaissance started by companies like Apple, Tesla, Google, Facebook, stocks trade on hype. They no longer follow the old-school fundamental models. Just look at what GameStop is trading at right now, or Bitcoin.

The second approach based on Technical Analysis, I'm sorry to say this but your technical analysis isn't that accurate.  There are just too many people using it, making it less reliable, and leaving you vulnerable to margin calls, or severe losses with put options. Although, if you had to short a stock for whatever the reasons, the route to go would be via put options, at least limit your potential losses. Shorting a stock directly can open you to infinite losses.


For those following the short reason of #3, where a famous short-seller puts out a famous report (like Citron Research), they often make a ton of money on the initial scare. If you look at the majority of their track record you will often see it's awful! Their short thesis revolving around being overvalued should usually be ignored. However, a short-seller can really nail it with stocks entangled in fraud and that’s when you should move out of the way (i.e. Luckin Coffee got exposed and went to 0).

Currently, as this article is written GameStop ($GME) is putting off a crazy short squeeze that is never-ending! Do not short! The market isn't rational; it does what it wants. Sometimes you get so caught up in the emotions of trading that you forget that no matter how right you think you are and no matter how over-valued you think the stock is, the market is boss. Remember that!

Epic examples of "easy" short trades in recent years have ruined trading careers and forced early retirement for many of those who continue to remain short Tesla ($TSLA) and GameStop ($GME). I remember back in the day when Amazon was trading around $180, Seeking Alpha published articles daily on why it should be shorted. Currently, as this article was written, it is trading at $3500! 

Often it is just best to avoid shorting all together, if you trade/invest in large-cap stocks, you will make money as the Market in the long term always goes up (despite 2000/2008/2020 Market crashes).

As a reminder the chart below is the S&P 500 for the last 20 years, does this look like a chart you wanna short? Especially in the last ten years. Where now the market is driven by the Federal Reserve printing infinite money.

S&P 500 in the last 20 years


Check out my other article on Why Stock Options Are Bad if you are interested in preserving your capital!

Comments

Post a Comment

Popular posts from this blog

How The Inevitable Lucid Motors Bounce Will Play Out

Image
Update 3/7/2021: The chart above has been updated, note the square box and 50 SMA as support was discussed/drawn a week ago, so it seems like the prediction has been spot on for now. Let's hope it continues. Update 3/17/2021: Additional Lucid Motors Technical Analysis can be found here . The Churchill Capital Corp IV ($CCIV) merged with Lucid Motors two weeks ago via a SPAC. After it was announced, the stock went into "sell the news mode". Which is typical for stocks that behave parabolically. The pattern plays out like this: a stock goes parabolic, comes crashing down, finally, after some period it continues higher. This pattern happens over and over, whether it is with Bitcoin ($BTC), Tesla ($TSLA), Virgin Galatic ($SPCE), and FuboTV ($FUBO). Within no time the stock will attempt to reach previous highs (any day to up to 2 months from now). So far it has already has pulled back over 65% from its highs since the merger.  Remember, the harder the fall the stronger the bo
Read more

The Most Compelling Case That Lucid's Stock Price Will Be $60+

Image
What if I told you that parabolic stocks aren't a pump and dump but the pullback following the initial euphoria is one of the greatest buying opportunities to generate alpha? At one time or another Bitcoin, Tesla, Apple, and Amazon were all parabolic stocks that suffered severe corrections, that once consolidated enough blasted higher. The catch here is NOT every parabolic stock that crashes continues higher.  You need to have the experience and fundamental understanding of what is a quality stock and avoid pitfalls. I've written a list of ten trading don'ts that help me avoid such a disaste r. Obviously, it's always more complicated than a list of top things to avoid, but it's up to the trader to gain that experience as well as risk management. One tip I can provide on whether a stock will continue to bounce is if it has an upcoming catalyst following the crash, this will keep the hype going. After all, the hype is what drives these stocks parabolically. The remai
Read more

Is Lucid Motors Finally Ready To Have A Bullish Reversal?

Image
In my original post  How The Inevitable Lucid Motors Bounce Will Play Out . I described several scenarios on how the inevitable recovery bounce will play out. Now the additional time has passed, we have more information to adjust the bullish prediction. Seems like we will have a slow grind trying to reach previous highs, where the catalyst is likely being the official merger and stock ticker change (Scenario 2) which will occur in June. Expect the price to surge higher prior to the official merger date. I have updated the chart from the original post and added new annotations in red shown above. What is pretty spot-on from the original post is that the 50 SMA and lower Bollinger Band did indeed provide support. Also, the black rectangle support box which was drawn over a month ago has captured the entire pull-back price range! So in other words everything is going as planned per the post, even though it's been a bit tougher than anticipated due to the overall condition of the stock
Read more