Posts Tagged ‘tips shorting stocks’

Tips for Shorting Stocks (Continued)

By: ispeculatornew | Date posted: 06.21.2008 (9:43 am)

In my last post I wrote that the most important thing to consider before you decide to short stocks is evaluate how the overall market is behaving. Once you determine the market is conducive to shorting stocks how do you determine what stocks to short?

In general you should look for stocks that are trading at high valuations but that don’t have the financial numbers to justify the lofty valuations. A good example of this is the run Jones Soda (JSDA) had in 2006 and 2007. The stock price of Jones Soda went from around ten dollars to over thirty dollars in about five months but the financial numbers of Jones Soda did not show any significant improvement. It was inevitable that that stock price was going to crash. To make matters worse for Jones Soda the company’s financial numbers started to deteriorate and the company is now trading at under three dollars.

My example of Jones Soda provides another thing to look for: rapidly deteriorating financials. Stocks that have rapidly declining earnings and revenues are good places to look for short opportunities regardless of valuation. At the beginning of 2007 most banks, bond insurers, home builders, etc. were trading at reasonable valuations. However, if you foresaw the havoc that the housing bubble collapse was going to cause you could have made a ton of money shorting these companies. (more…)

Tips for Shorting Stocks

By: ispeculatornew | Date posted: 06.18.2008 (9:20 pm)

A couple of months ago I wrote a couple of posts about what shorting is and how to place a short order. Now I will give you some general tips on how to make profitable short investments/trades.

In my opinion the most important thing to consider before you decide to short stocks is to evaluate how the overall market is behaving. In a very bullish market it would probably be wise to avoid shorting all together. The reason for this is that stocks prices can continue to go up in spite of very high valuations. For example you might have been justified shorting most stocks half way through the bull market of the 1990s. However, you would have lost a lot of money if you did because investors continued to bid up stocks regardless of valuations. In an irrational bull market like the late 90s the safest thing to do is avoid shorting until the market has clearly turned.

On the same token the best time to short stocks is when the market is clearly bearish. In fact shorting stocks may be the only way to make money in a severe bear market (short term at least). Also, speculative stocks that do manage to jump up in price in a bear market tend to correct quicker.

A market that is neither bearish nor bullish, such as the current one, also provides ample opportunities to short stocks.

I will describe what stocks provide good short opportunities in my next post.