3SOF

Hello 3 SOF Honours Members !

It's getting harder and harder to pick stocks that will rise strongly over the short term. Most breakouts end being fake. Most stocks are turning bearish. So I'm thinking, to keep the performance up, of considering some trades on the short side (it looks like there are many opportunities out there).

Or else I will embrace a hit and run strategy, looking for quick but small gains. Letting the profits run generally doesn't work on a bear market, not on the long side of the market.

Please give your feedback on this subject, either by voting on this poll or by writing some comments.

Thank you !

I'd really enjoy to see your strat on shorting stocks if you were to do so. I've always wanted to try shorting but im still trying to get the hang of going long so im sticking to that as of now. I think this would be a great idea and a valuable lesson for everyone here at 3SOF. Now seems like a good time to try it, stocks seem to always go down when you want them to go up  ;D.

Good luck David,

fousc

nice idea, but with my broker I will be not able to short stocks
:(

The way the market is turning, I think the only alternative to shorting is getting out of the market; "hit and run" trades have too much overhead.

But if you go that route, a lot of people, like fousc, will be first-timers...Probably would be best to be conservative with shorts, at least to start.

I  always try to be short in 2  or 3 stocks.. right now TOL and GM (-18 and -20 %). this week I should be covering this,  so I'm looking for another one since 2/3 weeeks ago, ...  Is not as easy ..when I'll get it I'll let you know...

David,
The poll leaves out one equation...."Have you ever shorted a stock?"...I have bought puts (lost my buttocks and adjoining cheeks... ::) )...I would like to see a planned short and observe the process. It involves margin if I am correct which is something that you are against (?). Please correct me if I am wrong.....but none the less, I think it would be a great learning experience even if I am watching from the sidelines..... :) ...

Rj

David, thanks for two (!) absolutely necessary ideas.
I vote for the shorting and... for the " hit and run strategy". I think it could be more efficient, more logical and ... more interesting  :)

Robt, you are quite right - "a lot of people, like fousc, will be first-timers...Probably would be best to be conservative with shorts, at least to start."

Unfortunately many people will not be able to short stocks and especially OTC (penny) stocks.
I see 2 management problems in shorting: broker's rules and account type. So, I hope, experienced members could give us (newbies  ;)) some recommendations.
For example: main short rules; brokers for OTC shorting (if it possible); how to handle margin account and so on.

Gregory

Quote from: fousc on October 11, 2005, 05:55:40 PM
I'd really enjoy to see your strat on shorting stocks if you were to do so. I've always wanted to try shorting but im still trying to get the hang of going long so im sticking to that as of now. I think this would be a great idea and a valuable lesson for everyone here at 3SOF. Now seems like a good time to try it, stocks seem to always go down when you want them to go up ;D.

Good luck David,

fousc

Thanks for your feedback fousc, I also believe it would be a valuable learning experience.

Quote from: la-onda on October 11, 2005, 06:07:51 PM
nice idea, but with my broker I will be not able to short stocks
:(

That seems to be a problem for some of our users, maybe half of them? Specially if your broker is European, they usually don't let a man short stocks ... (my European broker doesn't let me either). Probably only US based margin accounts are illegible to short stocks.

This is why the US markets are the most liquid and alive in the world, during good and bad times. It allows for professionals to make profits on Bear Markets too. Europeans and Asians should learn from the US, where even in the 1800's you could already short stocks.

A speculator needs to be free and available to profit from up and down moves. It improves his objectivity, not sticking to just one side of the market.

Even Livermore, in Reminiscences of a Stock Operator, a book from 1923, said:

«There's no bull or bear side of the market, just the right side».

I believe anyone who has a broker that doesn't let him short stocks should change broker (having the right broker and right commissions is much more important to success in trading than most people think).

Quote from: robt on October 11, 2005, 06:17:55 PM
The way the market is turning, I think the only alternative to shorting is getting out of the market; "hit and run" trades have too much overhead.

But if you go that route, a lot of people, like fousc, will be first-timers...Probably would be best to be conservative with shorts, at least to start.

I totally agree robt.

Quote from: Gu$tavo on October 11, 2005, 06:23:46 PM
I  always try to be short in 2  or 3 stocks.. right now TOL and GM (-18 and -20 %). this week I should be covering this,  so I'm looking for another one since 2/3 weeeks ago, ...  Is not as easy ..when I'll get it I'll let you know...

Thanks Gu$tavo, please post your short picks on the Members Board (by the way, we're in the process of organizing a better way for the 3 SOF Honours Members to exchange their stock picks)

Quote from: RJ on October 11, 2005, 06:38:58 PM
David,
The poll leaves out one equation...."Have you ever shorted a stock?"...I have bought puts (lost my buttocks and adjoining cheeks... ::) )...I would like to see a planned short and observe the process. It involves margin if I am correct which is something that you are against (?). Please correct me if I am wrong.....but none the less, I think it would be a great learning experience even if I am watching from the sidelines..... :) ...

Rj

Puts and calls are a losers game for the ones who buy them. It's the sellers who win long term. Trading them is much more dangerous than shorting stocks and I definitely recommend everyone to avoid those exotic financial products (I've seen many people go bankrupt and into debt because of puts and calls).

Shorting stocks doesn't involve trading on margin, but one needs a margin account to do it (it allows trading on margin, but you don't have to do it, just if you want).

That's the spirit, it would be a valuable learning experience. Even if one doesn't want to go short, he could learn some selling strategies ...

Thanks for your feedback, let's wait for more comments  :)

I have contemplated selling stocks short on numerous occasions but it was my perception that it would tie up more of my capital in a margin account therefore taking away from the percentage of my capital that I could have invested in the market on a given day.

please correct me if Im wrong

???

That's the spirit, it would be a valuable learning experience. Even if one doesn't want to go short, he could learn some selling strategies ...

David,

One of the reasons I am "home" is the fact that even when you are (less educated in speculation) you are still the gentleman....thank you for that.... ;)

RJ

hi david,
i have never shorted but would love to try it . i watched dlb (dolby) go from 24 to 15 in two months following an even swing trading pattern but never risked trying it even though my gut feeling that this was a crap stock ( great company though , it has been around for 40 years and is used in all audio equipment and cinemas etc. you know that little dolby button on your cassette player?)
also watched a bunch of retail stocks reach their peaks and start to turn around .
so count me in!
maxi :o

David - I would love some coaching on shorting... I have had some winners most recently MSO from 29 down to 21 , but more often my idea is right on but the timing is off.  I tried to predict the housing burst with CTX and BZH and took a hit because I had to bail just before they both dropped 30%.

So I think shorting in this market is a great idea,,, just which stocks???

Thanks for all the advise from everyone - this is a great resource to couple with DD

David, glad to see your finally considering the other side of the coin.  I've wacthed the market recently go from a short term decline to an intemediate decline and believe the axiom, the trend is your friend.  I've been waiting for you to initiate some shorts.  I'm all for shorting!  And I'm sure everyone has noticed that stocks often decline faster than making a move up.  If a stock goes from $10 to $5 it's lost 50%.  But to get back to $10 from $5 takes a 100% move!  

I'm also for "hit and runs".  So many times this year stocks make a short move up and the profit taking begins.  So I often take my money and run.  I can always buy in again if warranted.  

Keep up the good work and let's buy the 3 stocks on fire and short the 3 stocks tanking!

For those that cannot short due to their broker my suggestion is......CHANGE BROKERS!!!!!!  And for those inexperienced in shorting, watch, learn, and then take the plunge! (Pun intended).

I'd like to get some shorting experience. I have never tried it before.

David, could you provide a tutorial on shorting somewhere on the site?

Count me in.

Keep up the good work!

"Trade with the trend"  I would love to see some short positions on this awesome site.

I am typically a long term investor in longs, and I'd be interested finding stocks that I can short for a long period of time (i.e. 3 months up) since it's in distribution pattern.

Can't poll any of the options but would like to experiment provided it does not mess up my tax fillings :)

Hi

I am definitely interested in learning how to short. I have often wanted to learn, but just never

looked into it. Will watch and learn and may be take the plunge once in a while.

Lalitha

Shorting stocks is the more practical way to keep your account green. These markets are trending to the down side.

The only other choice I see are the commodity markets.

David:

Use any method of making money that you believe will work.

If you short - we will have another option available to us.  I would not do it often. 
I would set up a small account just for the purpose. 
Tax advantage type accounts will probably not allow shorting.

Hit and run works for me - I like it.

Time flys

Shorting will unfortunately be a minor activity for me but I can understand those that don't have a problem with it, will be able to benefit. Its just what I have observed in the 3 months I have been aboard, and I'm am sure opinions will vary but what I noticed is a scattered approach to what this site is about. For example, "Stocks on demand", lasted about 3 hours, S&P futures analysis, lasted a couple of days, three pennies on fire was added and now this. David, you have expressed on different occasions how over loaded you have been (IE not spending time with your child) and I just wonder where things will end up. I know the first comments coming back to me from those interested in shorting will be "We are here to make money", and I do agree. We all have different risk tolerances, different portfolio objectives and different philosophies so ultimately as with any company and 3sof is a company, the company will reflect the owner(David). Things are at a very flexible stagein the company, some people will be won  over and some won't. What I saw here at this site initially was momentum investing, combined with wealth preservation. David I was very excited about the fact that I was following someone who was 75% cash, it instilled comfort and confidence for me when things were starting to look uncertain in the market. Now whats my point. One, I hope the community maintains the quality members it initially had and second, I hope that David, your resources are not stretched to thin. I don't want this to sound too harsh but I have paid my membership and now realize that I do not exactly know what I have paid for. I know you are trying to act in the best interests of the majority but make sure it is what you want, then the quality should come through.

Good Trading All!

FWIW-
Been away for a few days and I come back to this very excellent news! I must say that I felt all along that we would inevitably get to this point because a good and successful trader uses ALL the tools that are available and takes what the market will give him/her. This is a very uncertain market for sure, neither bull nor bear, but certainly heavily leaning towards bear and one of the strong attributes of this type of market is failed breakouts. Traders are uncertain of the direction of the market so they are much quicker to take profits. Thus David's hit and run idea makes perfect sense.
  As someone who has shorted many stocks over the years, I think I can offer a few answers to some of your questions.
1) If you're broker does NOT allow you to short stocks, he is short-changing you. (No pun intended) and you really do need to change brokers. Otherwise, in this type of a market you will find yourself either sitting on the sidelines or worse, forcing trades that are really not there.
2)There is no great mystery to shorting stocks and you should'nt make more of it than it really is. My dear friend and mentor James J. O'Toole (Himself) always told me to keep it simple. Shorting is EXACTLY like buying a stock, but you do everything in REVERSE and he's right, it is really that simple.
3) Staying on the reverse theme, for those of you who use filters, the same thing applies. Instead of looking for support , you're looking for resistance and so forth.
4) There are NO extra special tax implications.
5) Trading options-- Now here is a statistic that for some strange reason, most traders. let alone options traders, do not know but I assure you it is true. ALMOST 70% OF ALL OPTIONS EXPIRE WORTHLESS. To me I don't find those type of odds appealing in the least.
6) Someone mentioned commodities and I can tell you from experience that unless you have a  VERY high tolerance for volatility and unless you also are well bankrolled and have a VERY high tolerance for the possibility of some heavy losses, you do not want to play commodities.
Anyway, I hope some of this helps and I look for ward to watching 3SOF getting into this part of the game. Leaving next week for a week or so in Ireland and in the meantime I wish you ALL only the very best.
Irish

Two other quick points as regards to some of the posts on this thread.  Just because you have a margin account ( Which normally means you have the necessary $ in your account that your broker mandates) does not mean that you have to trade ON MARGIN. These are 2 totally different things. Also, someone mentioned shorting OTC stocks. Not a good idea. Ever.
All the best.
Irish

In principle I am in favour, having never shorted (and being with a broker that doesn't allow me to) I'd be interested to learn, and perhaps follow some once I've changed my broker.

However, if this were to happen, it is imperative that the shorts board be separate (with separate cash) from the regular 3SOF board, and that 3SOF remain the priority.  I think that most investors here are swing and value investors, looking for short to medium term trades, and at present the 3SOF board is the most inclusive and profitable board here (well with the exception of EliteG's infinite compound, but I doubt anyone could keep up with Elite ;D).  Pennys are too volatile or many, and I for one can't trade most of them, and short trades may also exclude others who's acounts or investing philosophies prohibit them from trading them.

I think you will find that most people will be very happy to follow these and learn from them even if they don't trade them, just as long as the 3SOF main board continues to produce good picks with (hopefully) solid returns - lets just hope this doesn't start becoming too difficult  ;)

My goodness I find I have a lot to say about this subject. As a 35yr professional in the securities business I see the need for extreme caution should you go down this road. The subscription rate for your service is at a level, which is good, where many of your subscribers are building their investment knowledge on the buy side. The sell side of this market place requires a high level of DD on the fundamental side, not just TA. Risk is not finite on the sell side. I believe that your seasoned subscribers already have established guidelines related to their short sales. I would never allow an unsophisticated client to short a stock and many regulators place such a high bar related to" know your client" rules that many firms place very strong requirements for approval. There is a reason for this and your seasoned traders know I'm right. Your desire to provide profit opportunities is understandable but will you be able to educate your base related to risk to your satisfaction. I could say tell them to buy puts when they think they want to be on the sell side. They would only risk their premium and that is exactly what probably would happen. You started as a forum for traders to discuss trading ideas. Therefore,a discussion of short sales is appropriate. Let the members discuss everything they're doing in the market. Those who choose to follow along will. In my opinion your public portfolio should stay on the long side. Go back and read some of these threads, many of your subscribers are learning good tools related to the buy side. But are they ready for the risks on the sell side? David I agree with a point made early. This market is very difficult right now. More may not be better. Your followers will still be here if your 10% or 100% invested, guide them through these tough markets with your original plan. For those who want to learn go to a serious investment advisor. Learn how the account works, listen to his professional opinion related to your profile and risk tolerance. Be carefull

1reilly is spot on with his words of caution on shorting, and he talks from professional experiance. You must have a trade plan on the long side (entry / exit conditions) and it is even more important to have strict trade plans for the short side. Stocks take volume to make real breakouts to the up, but can fall on their own weight with little or no volume heavily to the down side. As many here have not shorted before and are interested I'll show my thoughts on VPHM. I posted on the VPHM members thread http://www.3stocksonfire.org/trading/index.php?topic=3062.0 on Oct 9th that I saw VPHM as a short. Now the best short candidates are those that have been performing hugely almost in defiance of the market / everything around them, VPHM fits that. Combine it with a negative sentiment brewing in the market and you have the right type of candidate for shorting. Think of TZOO and TASR from 2005 from Hero's to Zero's as it were. Look at my chart, the correct short entry was the failure at the middle bollinger band which was around $19, immediately on shorting the stock I would have entered a buy to cover stop order at something like $20.40, so my risk was then known being $1.40 per share. My exit target to the downside would be just around the lower bollinger band around $17, so I would either be buying to cover right now or waching to give it more room to play out. Also by now I would have moved my protective buy to cover stop order to my original entry point, so my risk is now minimal (well, bar slippage and gap up's). For 100% sure I would cover before the 50sma at $16.50 as probably every trader who has heard of VPHM will have their buy orders lingering around there. In terms of indicators on the VPHM chart I used MACD histogram to show me breakdown was in process and also weekly chart down daily chart up confirmed a short sell possibility.
So in essence that is a short sell trading plan on VPHM, now I didn't execute this plan as I had lingering doubts regarding Piper Jaffrey and their sort of invisible hand guidance of this stock to the upside (well i should have trusted my own analysis as it turns out, but what the hey!).
Finally VPHM earnings are out in a couple of weeks so again I would cover before then and conversly probably be looking for a long bounce play around the 50sma on earnings rumours.
Hope this was useful.

Never shorted before, but never traded before until this year.  Would love to try it a few times.  No low floats IMHO, they can skyrocket both ways, and I would not want to be short a low float with a juicy PR, nor would I want to be long a low float with a bad news pr.


oic 

I see no reason why your technical stock picking techniques would not be as profitable on the short side as it has been on the long side. You have provided us with a stop loss and a profit target on long trades, and this would be even more important on the short side.

I Hope you will limit short trades to a nominal percentage of the portfolio, say 25%. I try to do my  trading in a tax advantaged account, which will not allow short sales. No problem with a position in cash, as capital preservation is paramount! Better no trade then one you have doubts about.

Remember your broker must be able to borrow the shares for you to sell them short. Naked short sales are limited to the hedge funds and investment houses.  When following a momentum stock down, your broker may not be able to borrow shares for you to short, so your order will not be filled.

just aquick posting question.
how do you get the chart to fit the post without having to scroll?
anyone ?
thanks
maxi

Quote from: rickjust on October 12, 2005, 11:27:34 PM
just aquick posting question.
how do you get the chart to fit the post without having to scroll?
anyone ?
thanks
maxi

just trial and error maxi.. you gotta size your chart until it fits right  ;)  thats what I do.

Shorting is fun guys.. there is risk in everything market related and I think we are making it look a bit too dark.  The risk in shorting I look out for is not shorting a stock with something new about to come out(new drugs, new technolgy, new product..etc)  You get chance of less "new" the higher priced and older a stock gets.  I also look for a "higher" float" and I dont want too many people short(a low short %)
check: http://www.shortsqueeze.com/index.php?symbol=UNTD&submit=Enter

Haven't done enough DD but I may have a good quick shorty in UNTD with just around a 2:1 reward/risk ratio.  Bout 10% target.  5.91% float short and 61 million float.  Just watching it.

David, it looks like you have decided to go at shorting, I have to say I do agree with 1reilly on his/her feeling about it but things are evolving. All the very best with it. One thing I would like to request, I see some others are hoping as well, that you would keep it a separate forum (3shortsonfire). I don't know if you feel that it would be right, but it would help us that are not getting involved to keep track of your gains and loses on the long side. As with most people here I do not trade all the same trades you do, and its always nice to come back and see how lousy I did in comparison to how well you did. Adding shorts to that 3sof will make it impossible to do that.

Just my thoughts.
Anyway, still love the site

Good trading all!

David since it appears you will be using shorts is it possible to offer a put suggestion in tandom. This would allow many of your subscribers an alternative way to participate if they are prohibited or can't borrow the stock. Using eliteG's example of UNTD one might look at the Nov 15 put trading at 1.85. The stock at 13.47 has the put 1.47 in the money. Since most of your trades are short term I am using the Nov.s . Should the stock move to his target of 12 the put should trade at 3. Just a thought, most will qualify for put and call buying, and be able to use your expertise and also have a limited risk. Many of your seasoned traders may bundle the actual short with the put. Hope everyone has success.( Note all options carry a premium and must be factored into your trade. It's what you pay for some safety net and the leverage)
Mike

It's always a good idea to at least be mindful of someone's opinion who has had professional experience. I myself was a Commodities Broker for a number of years and in that position we used all trading methods at our disposal; Long, Short, Options, Futures contracts and so on and so forth. But we have many inexperienced traders in this community and I firmly believe it will be much easier to teach them how to short as opposed to trying to teach them about options, which, of course, are a much more complicated scenario.
I think we must always bear in mind what's best for the WHOLE of the community.  Those who have enough experience to take on something such as Options are certainly capable of doing so on their own. All the best.
Irish

thats an interesting idea on the put 1rielly  ;)  I swear that day I put up UNTD I first put in TRLG(then thought it was too risky for a first short).. 10% down the next day.  :D mannn

anyway I have a theory on trying anything new.  You can have somebody tell you every little detail and risk but you gotta try it yourself.  Try it very small and get out as soon as you feel uneasy.  Research what happened.  Try again.  Ramp up the positions if you get a feel.

eliteG and Irishman
I agree with both you on your related points. I am here because many of you remind me of the great experiences I had working around people who were always searching for some Gem in the market place and then shared that idea. The discussion about shorts should take place and I want to see all of the potential trades our members are thinking about. Each one of us will filter out the trades we feel don't fit our investment criteria. I'm personally short 6 positions. I think David has a bearish environment and a long public portfolio and that restriction frustrates his desire to make his community money. My comments were made because many subscribers may not be able to participate on the sell side of this market. Irishman you are right that the option market has many intricate possiblities. However, if David decides to short XYZ then by showing the put alternative allows everyone the chance to participate. A subscriber simply buys the put as he does a stock. He would then just follow Davids guidance regarding exit levels. For many the regulatory guidelines will be easier to participate. Finally, my initial reaction to David adding shorts to his public portfolio was probably too narrow and too conservative. Hopefully my discussion will cause the members to tread very carefully related to the sell side, sit down and talk to a professional about their risk profile, learn all they can and then strickly follow David's exit strategy. Good luck to all, I look forward to all recs in all sectors. Soon I will be able to post some of my ideas, which recently have stunk. Thank goodness I'm restricted you would have thrown me out of this community.

Ok... Here's my take on this whole shorting issue:

The folks who are expressing concern regarding this idea fail to acknowledge one thing.  They fail to acknowledge the weight that the general market puts on individual stocks. 

An individual can spend days researching companies and analyzing stock charts, but if he ignores the general market trend, doubtless he will lose.

Trading is a game of probabilities.  All your research and analysis does is help you be on the more likely side.  Inevitably, you will be wrong many times, and will have to exit positions.

Yes any random company may be exceptionally strong and buck the general trend.  The trouble is, you have no way of knowing whether you've found that company.  Even good stories get pulled down or at least tempered with the market.

The result of what I'm telling you here is that the first analysis before any trading must be: Is the general market trend up, down, or neutral?

From a fundamental standpoint, we also have expectations of whether this trend will change in the near future.

If the general market trend is bullish and is expected to stay that way, we should be looking for long opportunities because chances are we'll get the most bang for our buck in that type of market environment.

If the general market trend is bearish, we must spend our time looking for short candidates because probability says that is how we will maximize our trading profits.

If the market is sideways, obviously there is no particular bias, and both shorts and longs have equal probabilities.

By looking for long stories in a badly trending market, we will be putting ourselves at a disadvantage.  As others have said, the smartest alternative to shorting in a down market is staying in cash.

Many who write books on options and try to sell their advice on options often say you should buy puts instead because of the unlimited risk in shorting.  Yesterday from Optionetics.com

A far better way to accomplish the same type of objective is to just purchase a straight put or implement a bear call spread position. This is much better than actually short selling stock because you have limited risk versus unlimited risk and you can still profit from a decline in the stock price. In addition, the trader is not subject to any unwanted margin calls should the position go against them.

Depends on the stock, but I don't agree with the risk assesment.  No way would I consider shorting SVA or similar small cap rockets.  Most stocks don't move this much.  One thing you can be sure of is the TIME LIMIT ON OPTIONS.  If your timing is bad, you lose it all.  It also seems that stocks with many open option contracts are manipulated so the contracts expire worthless  >:D

I'd much rather short than buy puts. Shorts only have unlimited risk if you don't use stops. I find it easy to put stop on short positions -- way easier than on long positions. When I'm long a stock, I worry about the MM's manipulating the share price to "take out the stops."  This has happened to me far too often. I don't worry about MM manipulation on short positions because you don't often see them manipulate a price upwards.

As for put options.... with the premium you pay to buy a put plus the expiration plus the general tendency of markets to rise over time, I don't like puts. Has anyone heard of Optiontradershq.com (OTHQ)? It was a subscription service that started around the same time as 3SoF. The service was dedicated to buying naked put and call options. The service is no longer in operation. The jackass who ran it went all in on put options in late spring as the markets were coming off a bottom. By the end of summer the OTHQ portfolio was down 80% :D OTHQ no longer exists. Lesson to be learned: Buying naked options is risky!

QuoteThe jackass who ran it went all in on put options in late spring as the markets were coming off a bottom

Hey Lucas, yeh I am sure I saw your name appear in the OTHQ chat forum (before it got withdrawn, apologies if that is wrong). The problem the guy at OTHQ had was he always wanted to buy Puts (interestingly he did some Calls and made good money), he thought he knew the market would turn and everytime it didn't rather than changing or ammending his approach he just bought more Puts on a new timeframe (always tight timeframe like 2 months, so even if he was right he didn't allow enough time for it to play out before the option got hit by time decay). He was the classic loser in the market chasing and chasing his thought that the market will go his way anyday soon, of course it didn't. You could see clearly the whole thing was imploding and the guy did't want to listen to any friendly inputs regarding his strategy at all.
I belive the guy is still a moderator at a sister trading site to OTHQ.
I hope he is OK.

Good posts about shorting, particularly the cautionary statements about options.  Unless you have a lot of experience, I'd stay out of options completely.

I've been having trouble shorting.  A number of times, I've gotten the message from my broker (Scottrade): "No shares available to short."  Last week, I tried to short the QQQQs (proxy for the NASDAQ 100) and got the message: "Only 173 shares available to short!"  That really surprised me, given that the average daily volume is 101,000,000 shares.

I'm wondering if that isn't a statement about how heavily shorted the market is, but I don't want to infer too much from that.

If you're going to short, I'd suggest using a limit order.  You need an uptick in stocks to get filled on the short side.  You don't, however,  in things like the SPY, but I still use a limit.  Check with your broker about the uptick rule on ETFs...HOLDRS...I don't think you need an uptick on those, but check to be sure. 

Earlier this year, I put in a market order to short a stock that was rallying back to resistance, which is a good place to short.  It was rallying so fast, I figured that I wouldn't have a problem getting filled, and felt that it was alright to go ahead with a market order.  Wrong!

I waited...waited...waited...no confirmation of the trade...waited...waited...the stock got to resistance, then started to tank.  I still wasn't filled, and I had a market order in, meaning that I had to accept whatever price they wanted to give me.  I tried to cancel the order since the stock was dropping so fast, but that didn't work.  I got filled $1.00 below where I "intended" to short the stock, which amounted to about a 3% loss right off the bat (it was a $30+ stock).  So, be aware of that.

Another problem to be aware of...

I was short Alcan Aluminum (AL) in January.  Trade was going beautifully.  It was January 18.  The company had warned after the bell on Friday, January 14, hoping that the market would forget about that during the Martin Luther King holiday on January 17, but the warning wasn't ignored.   AL was down about $3.00 on the day, on a gap down.  Great!

That afternoon, I got an urgent e-mail from my broker, telling me that I had until noon the following day (January 19) to cover my short!  Then my doorbell rang, and a note from my broker arrived by Federal Express, saying the same thing!

What!   ???

I called my broker, and the upshot was that any time after three days, the broker can force you to cover your short position if they don't have enough stock to cover the number of shares that are shorted.  Must be that "naked short" stuff. 

Since I had a nice profit, I covered at the close on January 18, not wanting to risk a gap-filling rally in the stock by noon the next day, when I would be forced to cover.

You can guess how thrilled I was when AL gapped down almost $5.00 at the open on January 19, hitting my H&S top target after I covered.

Sure makes me think that "somebody knew something," but my point isn't to bemoan the trade.  My point is, be aware that you can be forced to cover your short position after three days, and be aware that you might have a loss in the stock at that time.

That's another argument, too, for trying to stick with shorting very liquid stocks.  Hopefully, your broker will have enough of it on hand, and you won't be forced to cover.

I think shorting stock is a great idea. We could always have some stocks in play for both the upside and downside of the market. That way we can make money both ways. And if the market is bullish or bearish, obviously we will have more plays in that direction.

I would like to see 3Stocks offer as their premium service both a Buy and Short board and eliminate the penny board. Pennies are too dangerous, time consuming and offer little protection: no stops for example. Besides why waste time trying to make money on pennies where there are so many great listed stocks to play.

Quote from: veteran on November 02, 2005, 11:55:20 AM
I think shorting stock is a great idea. We could always have some stocks in play for both the upside and downside of the market. That way we can make money both ways. And if the market is bullish or bearish, obviously we will have more plays in that direction.

I would like to see 3Stocks offer as their premium service both a Buy and Short board and eliminate the penny board. Pennies are too dangerous, time consuming and offer little protection: no stops for example. Besides why waste time trying to make money on pennies where there are so many great listed stocks to play.

Thanks for your and others inputs. Expect news on this subject this weekend.

Hello,
This is my first post, and I would like to congratulate David and Frederick for the genial idea of 3sof.
I would like to see, as mentioned above, a 3ShortsOnFire list. I have a suggestion though, and it is to have an overall list, both of longs and shorts. This is a sound practice, because you'll have your portfolio risk mitigated. Big changes in volatility will not be too damaging for the portfolio because it will be balanced between shorts and longs.

Quote from: Dwer on November 04, 2005, 09:33:18 AM
Hello,
This is my first post, and I would like to congratulate David and Frederick for the genial idea of 3sof.
I would like to see, as mentioned above, a 3ShortsOnFire list. I have a suggestion though, and it is to have an overall list, both of longs and shorts. This is a sound practice, because you'll have your portfolio risk mitigated. Big changes in volatility will not be too damaging for the portfolio because it will be balanced between shorts and longs.

I agree  :) Ou melhor, concordo consigo  ;)

Bem-vindo !

Shorting VLO
Seeing what happens with this Dilution news

 :D Obrigado David or should I say...(eheh, never mind).

David,

I just read all of the posts on shorting for the first time.

I am strongly in support of shorting in falling markets. Buying the dips in rising markets and selling the peaks in falling markets is trading 101.

Nevertheless we are not in a falling market right now but rather a sideways market. The expected return on the S&P 500 for 2006 is 1% plus a 2% dividend for a total return of 3% (There is a large potential standard deviation on that number!!!).

Shorting the S&P 500 now is cheap insurance on a portfolio. If the market takes off and the S&P 500 rises 10% for a 12% total return I will likely make far more than the 12% shorting loss by following your trading plan.

If the market continues as it has for the last year going sideways my hedge will cost me about 3% and I will likely make a lot of money from your portfolio.

If the market starts dropping I will make money on the short and you will likely have us all in cash or going short.

Once the time is right for shorting individual names we might want to look first at companies with negative earnings. If a company cannot make money in an expanding economy how will it make money in a contracting economy. A company with negative earnings has to have an extremely strong business case for it to continue rising in a falling market.

Second we may want to look at companies with junk bond debt ratings. I read yesterday that 2 out of 3 industrial companies on the S&P 500 have junk bond ratings. In a recession most of these companies will get hammered. (Spreads between junk bonds and treasuries are still relatively tight. As soon as spreads start blowing out it might be a good time to short industrials.)

Third there is always P/E compression in falling markets. Therefore shorting high P/E companies that do not have a strong business case is another thing to look at.

Fourth looking at sub indexes that are falling is another way to identify shorting opportunities. Specifically short companies in the sector that are not leaders in the sector  (the weaker companies). Go with the trend. (Note that it is obviously useful to understand the fundamental reasons for the fall in the sub index. Just as theme investing on the long side can be very profitable, so also theme investing on the short side can be as well.)

Fifth companies with contentious issues such as accounting problems, SEC investigations, senior management quitting without any explanation, litigation problems etc. produce good short candidates. (Another contentious issue in my opinion is senior managers getting high levels of fixed compensation relative to the size of the company.)

Sixth in the past I have looked at the returns of dedicated short managers and usually their returns are negative or flat at best except when a recession comes. It is evident that shorting all the time does not make money for most although it can be justified as a source of portfolio insurance. Short bias managers are starting to make a small amount of money now and I expect that will accelerate in the not too distant future. There is money to be made now through shorting specific names but it is primarily being made by those with strong skills in fundamental analysis. Once markets start trending down fundamental analysis becomes less important (although still important for maximizing profits) as the technical trend followers start shorting to go with the trend.

Seventh if we are going to start shorting names immediately we might want to have a "go to" list. As soon as the outlook is negative we would have an immediate list of companies we could access to short. This would likely be a list of high beta stocks that have shown a propensity to fall rapidly and materially when the indexes fall. The list would also have relative stop loss instructions for each name (for example, get out if you have a five percent loss or alternatively cover if the position breaks the upper limit of its volatility range for the last five days). Perhaps we could have a board where members can start suggesting short candidates backed by both technical and fundamental analysis. Included in the fundamental analysis would include both company specific issues and also themes and trends.

I am sure you are aware of the above but it might be a help to some investors less familiar with shorting.

QuoteI thought of going back to full invested again, but I feel that for just 1.5% of potential upside (according to my personal view, which can be wrong - I'll justify later) it's not worth it. What I'll do is to prepare myself for the next big move, which I think will be down, not up.
1285 points on the SPX, or 128.5 on the SPY, is the stop and reverse point. If we reach that point I will sell some longs and go predominantly short, even for the 3 SOF Fast Portfolio (specially in this).

Good luck and enjoy the bull ride, while it lasts 

David,

I also think shorting stock is a good idea. It's getting so hard to find a good picks in a bearish market and it's about time we see 3SOF Short . As most of us agree from the poll above we're here to make money.
More opportunities........better chances............of success (or failure)  ;D


[/size]


BTW  I see some of the members are shorting stock and it would be better if all the picks and comments are in one place. IMHO..... 



Good luck.
:)

Here is the Value Line index to show the typical 4-year cycle highs that usually happen in the first quarter of each 4th year. So the market may top in Jan to March and when that happens then shorts would be the way to go. The markets then usually make the 4-year low in that same year in the last quarter..

http://tinyurl.com/dmkl9

Right now the market of course is killer with most things just keep going up. The SOX broke out last week so that is very bullish and expect a nice year end rally that may last into Feb or March as most think it will end in January like last year.

There are short to be had at any time but it is best to not fight the general market trend which now is strongly up and as fund managers want to hit the best numbers they are likely to keep buying into the end of the year at least and then new money comes in in January

Hi david,
Do NOT consider short positions at this time!  It will result in probable disaster!
Right now, Program trading is 'in control' of the markets, this planned drop in stocks today & tomorrow is to rebalance the markets.  Then we lift off to reach Dow 12,000 before years end.

Do NOT get whipsawed out of long positions in stocks.  They're going much-much higher, IMO!  Next year too!

all JMHO...

willey

I haven't set up a short trade account (more paperwork) with Scottrade yet, though I'm tempted to bite the bullet and put it through.

Just saw an excellent short candidate based on David's success with SPEX - check this news:

Spherix's Toothy Smile

By Matthew Goldstein
Senior Writer
12/9/2005 4:13 PM EST
Click here for more stories by Matthew Goldstein

Updated from 11:09 a.m. EST
Spherix (SPEX:Nasdaq - commentary - research - Cramer's Take), the sugar-substitute maker whose stock has more than tripled this week on prolific volume, has a few cavities.

For one thing, the Maryland company bills itself as a science concern, but just about all of its $22 million in annual revenue comes from a tourist-reservation business it manages for state and national parks. It's a niche business that Spherix has managed to achieve some success in.

Selling tickets to see Old Faithful is not what got investors excited about Spherix, however. It's the company's long-held dream of finding a way to cash in on a low-calorie sugar alternative called Tagatose that's got investors frothing.

So far, Spherix has found few takers for its sugar substitute, which it has been trying to market for the past nine years under the brand name Naturlose.

Arla Foods, a Dutch company with the exclusive license to manufacture and sell Naturlose, has not generated any meaningful royalties from sales to food and beverage companies. Spherix also has made little from its attempt to market the milk byproduct as a sweetener for use in toothpaste, mouthwash and over-the-counter drugs.

There seems to be little demand for Naturlose as a food additive given the growing popularity of Johnson & Johnson's (JNJ:NYSE - commentary - research - Cramer's Take) low-calorie sugar product Splenda.

But hope springs eternal at Spherix, which believes it's on the way to getting Naturlose approved by the Food and Drug Administration as a drug to treat Type 2 diabetes.

On Dec. 6, Spherix issued a press release saying the FDA had "cleared the way" for the company to begin the final phase of clinical tests on Naturlose before seeking approval from the agency to sell it as a diabetes treatment. The company said the FDA gave the green light to begin the clinical trials following a meeting last month with several of Spherix's scientists.

The FDA, as a policy, doesn't comment on clinical trials before a drug is approved for market.

Nevertheless, the press release gave a sugar rush to Spherix's shares, sparking some frenzied trading in the normally sleepy stock with just 12 million shares outstanding. A day after the FDA announcement, more than 13 million shares of Spherix changed hands. On a good day, 50,000 shares of Spherix might be traded.

More significantly, Spherix share price took off like a rocket, rising from $1.27 a share on Monday to close at just under $5 a share on Wednesday. It fell back to $4.49 Thursday and slid again Friday, losing $1.04, or 23%, to $3.42.

Investors who binged on Spherix shares may have set themselves up for a sugar crash.

The company has lost money in each of the past three years and remains a long way from getting FDA approval for use of Naturlose as a drug. Indeed, the initial clinical trials using Naturlose as a diabetes treatment were "small" studies conducted by the University of Maryland about five years ago, Spherix said.

The early clinical trials, according to a company Web site, found that tagatose did not lead to any changes in subjects' glucose and insulin levels, and also helped with weight loss. The study concluded that tagatose, the product's scientific name, could be useful as a treatment of diabetes in conjunction with other drugs.

Of course, there's no guarantee the clinical trial will succeed when it's expanded to a much larger sampling of the population. Even Spherix acknowledges the company is a long way from getting FDA approval.

"The big hurdle is phase III," says Gilbert Levin, Spherix's chairman and chief science officer, who founded the company 38 years ago. "But getting there is no easy matter."

On Friday, a day after Levin talked to TheStreet.com, Spherix disclosed that the company's patriarch sold 62,900 shares on Dec. 7 and Dec. 8, after the announcement about the FDA meeting. The shares were sold at prices ranging from $4.60 to $4.75 a share, generating proceeds of about $289,000. After the stock sales, Levin reported owning 1.16 million shares.

So far, Levin, who owns 10% of the company's shares, is the only Spherix insider to cash in on the surge in the company' stock. Corporate insiders own about 21% of the company's shares. The other big inside shareholder is Levin's wife, Karen, who also has 10% equity interest. His wife is a director and vice president.

Levin, 80, is a big believer in Naturlose and its potential medical miracle. In 1995, when he was the company's chief executive and president, Spherix patented Tagatose as a treatment for Type 2 diabetes.

If nothing else, Levin, who turned over day-to-day control of the company earlier this year to his nephew Richard, is persistent.

To this day, he insists that an experiment he designed for use on the Viking space probe mission to Mars found signs of life on the red planet. NASA officials reject that claim, saying there was a problem with the results sent back by the unmanned spacecraft in 1976.

Levin, however, remains unmoved and believes his Mars experiment eventually will be vindicated. He says the same will happen one day with Naturlose.

"No major discovery was ever received favorably by peer review when it was made and that goes for Galileo and everyone forward," says Levin. "I'm sure it's going to be a very widely used product."

Earlier this year, Spherix suffered a setback in a clinical trial studying another potential medical use of Naturlose. Trials at the University of Maryland School of Dentistry didn't find any benefit from Naturlose in fighting the formation of plaque on teeth. The university's findings were "contrary to earlier laboratory findings by Spherix," according to the company's filings.

Investors also should bear in mind that Spherix, unlike most biotech companies that spend heavily on research and development, is a bit of a tightwad. The company reports spending just over $1 million on R&D over the past three years.

While Spherix waits for the results of the planned clinical trials, it may find itself hard-up for cash.

The company says it's facing the imminent loss of its contract to provide tourist reservation services for the National Park Service. Earlier this year, the Park Service awarded the contract, which accounts for 17% of the company's revenue, to a competitor. Spherix is protesting the decision, but says it cannot predict the outcome.

In an attempt to raise some badly needed funds, Spherix this summer turned to Cornell Capital Partners, a Jersey City, N.J., hedge fund. Over the next two years, Cornell is investing up to $4 million into the company through a financing vehicle known as a PIPE -- shorthand for private investment in public equity.

Last week, TheStreet.com reported that Cornell Capital is being investigated by securities regulators for its trading activity in shares of nine companies that it allegedly provided financing to. There's no indication that regulators are looking into the Spherix deal.

In many respects, the PIPE deal makes sense for Spherix because it provides it with a regular source of cash and because the company has few places to turn for financing. The deal is also good for Cornell because it gets to buy 2.38 million shares at a discount to their market value and can then quickly resell them.

But the flood of new stock is bad for current stockholders. In a filing discussing the deal, Spherix says its "common stock price may decrease due to the additional shares in the market."


So what we have is a Company that's main source of revenue is providing reservations for the parks dept. (and is losing that contract) that has invented a new Nutrasweet and has issued a misleading press release (Hello HYRF  >:() implying it's a possible Diabetes treatment, while the whacko former CEO unloads stock during the run up.

This thing will continue falling like a rock, IMO, back below $ 1.00

Quote from: KCScott on December 10, 2005, 11:35:53 AM
Just saw an excellent short candidate based on David's success with SPEX.
......................................................................................................
This thing will continue falling like a rock, IMO, back below $ 1.00

KCScott,

I also believe that SPEX will go down as quickly as it rose up. We have seen that kind of movement many times but unfortunately Scottrade have some restrictions about shorting and one of them is they don't allow shorting a stock bellow $5. >:(

Given David's message today, I have opened a margin account with Scottrade to begin shorting.

Jimbo, you were correct - You can't short any stocks under $5.00

As for selecting prime candidates for shorting, I recall from a recent episode of Mad Money, Cramer described several conditions that would cause him to sell ahead of the herd:

Competition - ie; Music retailers losing business to digital media
Accounting problems - restatement of earnings
Over expansion - Integration problems with acquistions / building too many stores
Government Interference - Regulation

Most downgrades occur, obviously, after the "train has left the tracks"

I also like the idea of using personal experience as a basis.

I can think of several products that I'd never use under any circumstance.

One of them is  CRM = salesforce.com

Our company ran a test with this a few years ago and it was the most hated product I had ever encountered. There were a myriad of glitches and support was poor. We ditched it after the 90 day evaluation.

I looked at CRM and found they have had a huge bull run this year.

VALUATION MEASURES   
Market Cap (intraday): 3.62B
Enterprise Value (28-Dec-05)3: 3.49B
Trailing P/E (ttm, intraday): 150.50
Forward P/E (fye 31-Jan-07) 1: 145.26
PEG Ratio (5 yr expected): 3.27
Price/Sales (ttm): 12.91
Price/Book (mrq): 19.31
Enterprise Value/Revenue (ttm)3: 12.77
Enterprise Value/EBITDA (ttm)3: 153.164

What has propelled this astronomical valuation?

Income Statement
Revenue (ttm): 237.07M
Revenue Per Share (ttm): 2.271
Qtrly Revenue Growth (yoy): 77.30%
Gross Profit (ttm): 142.92M
EBITDA (ttm): 17.48M
Net Income Avl to Common (ttm): 15.16M
Diluted EPS (ttm): 0.13
Qtrly Earnings Growth (yoy): 330.80%

Several Blow out quarters

So why consider shorting a stock with this much growth momentum?

Several factors:

1. Many companies are moving Contact Relationship Management in house as part of their Enterprise management software. (It used to be done with individual programs like Goldmine, Act or Maximizer)

2. Pressure on companies to lower SGA expensesof which CRM falls onto budget (at least in mine)

3. A valuation that surpasses Oracle, SAP and Google

4. Salesforce.com insider sales of 3.5 Million shares in the last 3 months

5. Negative Publicity - recent technical support problems including a power outage and a recently dismissed lawsuit

6. 3 analyst downgrades this month:

19-Dec-05 UBS Downgrade Neutral Reduce
16-Dec-05 Banc of America Sec Initiated   Neutral
12-Dec-05 Susquehanna Financial Downgrade Neutral Negative
12-Dec-05 Jefferies & Co Downgrade Buy Hold
2-Dec-05 Prudential Downgrade Overweight Neutral

So that's the case for shorting CRM, along with the break of the mid October trendline.

Thoughts?

David
I'd like to ask you a technical question which I think we need to know if we are to follow you on a short sale. As you know when you enter an order to short a stock your brokerage firm must be able to borrow it. This can only be confirmed at the exact time of the order. So, let's say you put out a short recommendation in the news letter, then enter your order and find you can't borrow the stock. Will you immediately notify us that you were unable or will you immediately purchase a put? Just wondering because There have been numerous occasions when I have shorted a stock and tried to add to that position and was unable to borrow additional stock even in a 10 minute time frame. Also, I am still of the opinion that the short portfolio should be  separate. I think we'll find members unable to borrow the stock and that means all positions are not available. I think this would actually create a great view of the  long portfolio and the short portfolio with each reflecting the origins of a total performance number

 

QuoteI'll use that cash to sell stocks short and buy puts (probably no more than 1% of capital in each position).

David,

I have to admit I don't know anything about options but I understand that occasionally we going to buy puts. If that's the case it means I have to activate that service with my broker ?


BTW here are the the steps to do that with Scottrade, in case someone is interested:  ;)
----------------------------------------------------------------------------------------------

OPTIONS APPLICATION

Please complete the following steps:

Download form    (Get Acrobat Reader to view PDF forms)

Open a new account with Options Trading
Add Options Trading to an existing account

• Download PDF form
• Complete the Options Application Form
• All account holders must sign the application
• Mail the application to your local Scottrade office

   

** Scottrade policy allows clients approved for Options to complete the following transactions:

Sell Covered Calls
Buy Calls
Buy Puts

**Scottrade does not allow put selling or naked options.

------------------------------------------------------------------------------------------------

Thanks
:)

My thoughts as well.  Take REDF for example, I have been trying to short that for 3 days now and I couldn't borrow shares.  I just can't believe every share of REDF is already shorted.  I think the MM knows it is going down and doesn't want anyone else to short it.  I know execution wise this "game" is rigged but this is ridiculous.  Maybe I just need to change brokers.  I'm using E*Trade Complete and it took them over 15 min to fill my order for GIGM last Friday and I see a lot of transactions going through before I got a fill and my limit price was two tiers above the best bid.

netfishmademe
The marketmakers have nothing to do with your ability to borrow the stock. The brokerage firm must be able to borrow it from an existing long . It's called hypothecation and you allow the brokerage firm to hypothecate your stock when you sign you account agreement form. This of course can only happen when you allow the firm to hold your stock. Hope this helps you better understand why there will be times that your firm won't be able to borrow the stock.

I talked to my Scottrade broker and he indicated if I can't get the shares online to call and they would call other brokerage houses to get the shares.

He said all of them come out of someone else's margin accounts.

KCScott
That is exactlly what is done. However, stock can be borrowed from any street name account, cash or margin, i believe. The point is the Market Makers have nothing to do with this. Now when you're talking about naked shorts you're going to find out that almost all naked shorts are the market makers. Firms won't let a retail account fail to deliver they'll just buy us in. It's the market makers who really stretch these rules.

Hi David,

Market breadth has improved markedly ( these last two days ).  New accumulation in many stocks is ocurring now!  The markets are poised for significant breakouts!!!!

Shorts will likely be slaughtered!  It pays NOT to be short at times like this in the markets!

willey

David,

I agree with your argument for a drop in stock prices.  However, the large cap stocks are leading this rally.  There may have been institutional distribution in December, but that seems to have reversed this week.  A chart of the weekly SPX shows a clear uptrending channel.  This week's rally has brought it to the top of the channel, and there may be some profit taking next week.  The breakout failures in late December came on weak volume.  This week's rally had strong volume behind it. 

There will be a time to aggressively short this market, but I think you may be trying to pick a top here.

Quote from: czahara1 on January 06, 2006, 05:32:58 PM
David,

I agree with your argument for a drop in stock prices.  However, the large cap stocks are leading this rally.  There may have been institutional distribution in December, but that seems to have reversed this week.  A chart of the weekly SPX shows a clear uptrending channel.  This week's rally has brought it to the top of the channel, and there may be some profit taking next week.  The breakout failures in late December came on weak volume.  This week's rally had strong volume behind it. 

There will be a time to aggressively short this market, but I think you may be trying to pick a top here.

I agree with you czahara1, please read «GIGM saved the 3 SOF Portfolio (http://www.3stocksonfire.org/trading/index.php?topic=4158.msg40942#msg40942)».

Thanks for your post and welcome to 3 Stocks on Fire  :)

Looking at the 192 closed trades in the "2 SOF" category I see that there were 7 short buys; all but one resulted in a loss. The average loss of the short trades was 3.9%.

Nevertheless, I am for an increased proportion of short trades and share the hope that this will help improve overall performance of the portfolio.

Good luck to us all.

Maestro