The Best Trade in the Current
Mini Bull Market: Short Selling

 institutional investorsThere’s been a lot of money made in the stock market lately and it isn’t from being long. The big story this year has no doubt been large-cap, dividend paying stocks, but I have to say that some of the best speculative bets have come from short selling. All the more impressive; the short selling money is being made during a stock market rally.

I’ll say straight up that I’m not a big fan of short selling in the stock market. Tons of institutional investors and individuals do it, but I don’t. I just don’t like betting on a company’s downfall and that’s what short selling is. Some would argue that a short selling trade was initiated because of a high stock market valuation, but I don’t care. Anyone short selling really hopes for a share price of zero. Myself, I’d rather invest in a business, not bet on its downfall on the stock market.

But, lots of people do engage in short selling and the profit from a declining share price (as well as institutional securities lending) can be substantial. As always, you need the right trade at the right time at the right price. Consider First Solar, Inc. (NASDAQ/FSLR), which is an enterprise I’m a fan of. It was only a short time ago that solar energy stocks were some of the best performing stocks in the marketplace. A lot of them were really hot when institutional investors embraced the alternative energy investment theme. Now, of course, the equity landscape is littered with solar energy casualties. The entire sector experienced a big boom, a major price correction during the financial crisis, and then a long period of stock market malaise as competition and over capacity took hold.

Last April, First Solar was trading around $150.00 per share. Ever since then, the stock’s been in a sustained downtrend. The stock’s current value is approximately $22.00 per share, highlighting an outstanding short selling trade. All the other solar energy stocks within the sector experienced similar trading action.

Short selling is a tough investment strategy to get right and often your broker can’t borrow the securities to make the trade. But if you look at a stock like First Solar and consider its stock market performance while the broader market was rallying, the trade was much better than going long a comparable sized company. It’s easy to identify short selling trades—just look to where the current hype is and wait for it to break down. This year, large-cap technology companies have greatly outperformed the rest of the stock market. (See PC-02-29-12 NASDAQ Blasts by the Dow Jones—Another Positive Signal.) Come the next recession (2013 perhaps), this group should make attractive short selling candidates. And there’s plenty of stock out there to borrow.