If you are not familiar with “shorting” a stock, it is a process by which an investor can make money when a stock is falling in price. The same way you call your broker and say, “Buy 100 shares of ABC Company,” with shorting you call your broker and say, “I’d like to short 100 shares of ABC Company.”
To make money shorting, the stock that you are betting will fall in price needs to do exactly that. If the stock rises in price, you have to either pay the difference between the stock’s new high price and what you shorted it at or actually buy the stock at its new high price.
There’s big money in shorting individual stocks that are experiencing decreasing market share, management changes or simple profitability issues. And it’s really not that complicated. (We actually have a newsletter on short selling that delivered a profit of over 100% per recommendation in 2007. Learn more at:http://www.lombardipublishing.com/ads/ssc/index.asp)
I’m not a big fan of shorting large-cap stocks, like those stocks that comprise the Dow Jones Industrial Average. Whenever a stock price gets too far ahead of itself, short sellers come in and bet that the stock will fall in price. For years short-sellers bet that Google had risen too far in price. Sometimes the short sellers made money when Google stock came down, but most times they lost, as this anomaly in the tech sector just kept moving higher in price.
The reason I am bringing up short selling today?
The New York Stock Exchange publishes figures that tell us how many shares are sold short on the NYSE. Recently released figures on the NYSE are shocking.
There are over 16 million shares now sold short on the NYSE — a near record. Stocks on the NYSE are big-time stocks. And for those short sellers to make money from stocks they have shorted on the NYSE, they need lower stock prices.
In the event that the short sellers as a group are wrong (and they usually are when they take such big positions), a rising stock market will put a classic “squeeze” on the short sellers as they cover their positions. I believe that this could result in current stock prices moving sharply higher, as the short sellers are forced to buy stocks they originally shorted. That, my dear reader, is the short of it.