logo
  Join        Login             Stock Quote

The Right Time To Short Stocks

 July 08, 2010 11:45 AM


By Jeff Clark

It's dangerous to be short stocks right now. 

Yes, we entered a bear market last week. And yes, stock prices will likely end the year far below where they are today. But as I argued here and here, stocks are so oversold and investor sentiment is so pessimistic, a bounce is inevitable. 

We got the first stage of that bounce yesterday. And based on the look of the following chart, we still have a ways to go... 


This chart illustrates the percentage of S&P 500 stocks trading above their 50-day moving average – in other words, stocks displaying bullish price action. 

Prior to yesterday's rally, fewer than 10% of stocks were in bullish patterns. That's the same oversold condition the market hit when it bottomed back in March 2009. 

It's also the same level this chart hit when the previous bear market kicked off in January 2008. 

In fact, the parallels to 2008 are eerily similar. Stocks were oversold when the monthly chart of the S&P 500 dropped below its 20-month exponential moving average – my favorite indicator for determining bull and bear markets (and something I recently wrote about here). Despite triggering a bear market, the S&P 500 rallied more than 8% over the next four weeks and dealt a crushing blow to overly aggressive bears who were hoping to make some easy money betting on the downside. 

That's what bear markets do. 

Of course, they're brutal to long-term investors who insist on holding stocks in a declining environment. But bear markets also crush traders who try to sell short into oversold conditions. 

The biggest "one-day wonder" rallies always seem to occur in the midst of a bear market. They serve to shake out the traders who got a little too aggressive betting on the downside. 

There will be plenty of opportunities to make money shorting stocks in the midst of this newborn bear market. There's not much to be gained, though, by shorting stocks when more than 90% of the S&P 500 is already trading below its 50-day moving average. 

Be patient. Give this rally a week or two, or maybe more, to run its course. Start nibbling on short positions when the S&P pops up closer to 1,080. 

Best regards and good trading, 

Jeff Clark
iOnTheMarket Premium
Advertisement

Advertisement


Comments Closed


rss feed

Latest Stories

article imageChart Says This Retailer's Comeback Isn't Finished

One of the surprises, at least on the surface, of the market's recent swoon was the outperformance of read on...

article imageETF Performance Review: Major Asset Classes | 19 Dec 2014

It’s all about real estate investment trusts (REITs) these days when it comes to bullish performance among read on...

article imageOil and Global Stock Markets Rebounding Sharply

So far so good on our expectation of a 4 to 5% pullback and then a resumption of the bull read on...

article imageGrading the FOMC

Love its members or loathe them, you have to admire the gradual impact the policy-making committee has had read on...

Advertisement
Popular Articles

Advertisement
Daily Sector Scan
Partner Center



Fundamental data is provided by Zacks Investment Research, and Commentary, news and Press Releases provided by YellowBrix and Quotemedia.
All information provided "as is" for informational purposes only, not intended for trading purposes or advice. iStockAnalyst.com is not an investment adviser and does not provide, endorse or review any information or data contained herein.
The blog articles are opinions by respective blogger. By using this site you are agreeing to terms and conditions posted on respective bloggers' website.
The postings/comments on the site may or may not be from reliable sources. Neither iStockAnalyst nor any of its independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. You are solely responsible for the investment decisions made by you and the consequences resulting therefrom. By accessing the iStockAnalyst.com site, you agree not to redistribute the information found therein.
The sector scan is based on 15-30 minutes delayed data. The Pattern scan is based on EOD data.