Trading The Short Side

of the market can be nerve wracking. In a lot of ways it can feel unnatural. Short sellers have even been criticized as being “un-American” or “un-Patriotic”. Truth is, short selling is a legitimate strategy for making money in the markets and to not sell short is like fighting with one hand tied behind your back. With all the market uncertainty it is naiive not to have short side market exposure. There are structural problems with our economy and they are problems that are too big to go away quickly. These problems are likely to haunt our equities markets for several more months.

Trading short can be very dangerous, the theoretical losses are unlimited. For almost 4 weeks I have been suggesting that only the most aggressive and disciplined traders should be involved in the market, I still think that is my best advice for most participants. I have been trading short with good results but I am constantly reminded of the possibility of a “surprise rate cut” or some other catalyst that could make the market exlpode higher for a short period of time. Bear markets typically see some of the most violent upside moves as short sellers scramble to lock in gains and they compete with the optimistic participants who hang onto every shred of good news as the sign of a bottom. Bear markets are characterized by more emotion than a bull market because people are complacent when they are winning and frightened when they are losing, fear is a much larger motivator than complacency. If we see any such moves higher, they are not likely to last as long as the 50 DMA is heading lower.