A Bull On Fire Representing the Strong Stock Market

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. Since the technology renaissance started by companies like Apple, Tesla, Google, and Facebook, stocks have traded on hype. They no longer follow the old-school fundamental models. Just look at what happened to stocks like Carvana and cryptocurrencies like Bitcoin.

The second approach is based on Technical Analysis, I'm sorry, but your technical analysis isn't that accurate.  Just too many people are using it, making it less reliable, and leaving you vulnerable to margin calls, or severe losses with put options. However, if you had to short a stock for whatever 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 nearly to 0 before bouncing back almost half a decade later).

In the last few years stocks like GameStop ($GME) and $AMC have pulled off some epic short gamma squeezes! Which has caused many hedge fu billions of dollars. Do not be 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 continued to remain short Tesla ($TSLA) and GameStop. Around 2011 Amazon was a huge short target and many articles were published on Seeking Alpha on why it should be shorted. Currently, at the time this article was written, it is trading at 10X what it was during that time! 

Often it is just best to avoid shorting altogether, if you trade/invest in large-cap stocks, you will make money as the Market in the long term always goes up (despite the 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

You may be right about a stock being overvalued, but you don't have the resources to efficiently short and become profitable over the long term. Maybe you get one or two lucky trades and that will give you false hope. In conclusion, NEVER SHORT, and if you must do it via put options. However, options are also dangerous which I have also covered why in depth in the linked article.