The Iconoclast Investor

Here’s another question I received recently. Again, feel free send us any questions you have and keep checking back to see them get answered.

Question: What are some prudent ways of shorting stocks if this downtrend continues?

Answer: Shorting is more difficult than buying for one main reason–fear is a more intense emotion than greed, and thus, drops tend to happen more quickly than rises.  That means your timing on short sales must be more precise than your timing on long investments.

Still, shorting can be done profitably.  The keys are: To short past leaders that had huge upmoves, are well known and very liquid; to short only after a definitive top in the stock (and the market) is in place; to short AFTER a multi-week rally, generally up to the 50-day moving average; and to take both losses and profits quickly.  You don’t want to wait around for a huge rally in the stock; you’re better off nailing down 20% to 30% profits on the short side.

The other option, if you want to take out the risk of individual stocks, is to short exchange traded funds (ETFs) of indexes like the Dow or S&P 500, or if you want more risk, buy the inverse ProShares of those same indexes (symbols DXD and SDS, respectively).  Again, just remember to short after rallies, not after a few weeks of declines.