Monday, June 13, 2011

Getting Ready to Short

"Things are going to get a lot worse before they get worse." ~ Lily Tomlin
I've come to the conclusion that the I need to start shorting stocks to protect our retirement and savings accounts.  In the past, I shorted some stocks while keeping my long positions. So our portfolio was still net long. This time, I plan to short stocks with 95% of our portfolio in cash.  So our portfolio may be net short this time.

I plan to short stocks with the following characteristics:
  • Already in a downward trend.  Some stocks have been declining since the beginning of 2011. Unfortunately,  I know they exist since I previously owned two stocks that have declined since January :  Ford and Citibank.  I know there are others that have been declining for six months.  Other stocks have been declining since April.   Both types are worth considering for shorting. 

    I have learned not to short a stock that is still rise or near its peak, even if I believe it's overpriced.   Such a stock can keep rising for a while before it declines, resulting in significant losses for someone shorting the stock.
  • High short interest.  Generally, people who short stocks do extensive research.   High short interest means a large number of knowledgeable people believe the stock is going down and have invested as such.  The threshold level I use for high short interest is 5%.
These stocks are already weak, and will get weaker in a downward market.  If the overall market continues to decline, stocks that meet these criteria will be my prime candidates for shorting.
For more on Strategies and Plans, check back every Monday for a new segment.

This is not financial or investing advice. Please consult a professional advisor.

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