Are you profiting from the Bear Market? By Vince Stanzione
When people find out that I am a professional trader/investor the next question tends to be, “what’s a good share to buy?” nobody ever says “what’s a good share to SELL short”.
Millionaire Traders sell short. They make money in down markets. The best traders make money going up and going down. Selling short seems to always get a bad press. To make money in a down market is supposedly unethical to many. Nonsense, the market rules say you can go long and go short. Why would you not want to use all the tools at your disposal? What I don’t believe is ethical is shorting small cap companies, in most cases Spread Betting companies will not let you short sell anything less than a 50 million cap. In my own trading I really don’t start shorting anything with a market cap of at least £500 million. Of course by the time I look to get out of a short trade the market cap may be way lower.
It seems that the public are conditioned just to buy and hold, which is fine if we are in a long term bull market but at present we are not and I honestly don’t see a bottom in site. It seems that the financial world wants to get this bear market over as quickly as possible but you cannot force markets to repair themselves quickly, it takes time and in most cases years not months.
On the whole markets and shares go down quicker than they go up, if you look at the UK house builders they had a great up move from 2000 to 2007, but if you look at the fall in the last 12 months you will see the fall has been faster than the rise. On the same subject, I had a few emails asking if I would buy the House builders as they are so “cheap” at present. We all love bargains but “cheap” shares in many cases get cheaper.
Of course, when you short sell at some stage you have to buy back and cover, as the price gets closer to 0 then you have less and less meat on the bone, In the case of Barratt and Taylor Wimpey I have been covering shorts and taking profits, my work is done with these companies and I am now off to my next targets. When a Share drops from over £10 down to 30 or 40p, I don’t need to hang around to catch the last few pence.
In the last few weeks I have started building up a short position in Admiral Insurance (LSE:ADM) from around the £8.80 level. I see the General Insurance markets becoming more and competitive, I also predict a trend of people selling up 2nd cars and trading down to minimum insurance.
Chart: Tougher times ahead for Admiral Group, Looking for a move down to below £6. Its Confused.com price comparison website is finding it hard to attract new customers.
Of course, all my short sells don’t work out, last year I was short Carpetright and then out of the blue Lord Harris announces he was going to take the company private, causing me to be stopped out and taking a £10,000 loss. In the end he never did go through with it and since then Carpetright has sunk. In other cases you may short sell a company only to see it continue to hold up, so you don’t make much or lose much. However sure you are that a share is going down you always need to have risk management, open a small trade and as it moves in your favour sell some more.
If you don’t want to short sell individual shares then short sell an Index. As stated in previous editions I prefer the FTSE250 to the FTSE100 as a short sell. Anyone following my covered warrant trade last month on the FTSE250 using SQ30 would be up over 55% in less than a month. Of course, nothing goes up or down in a straight line – that would be far too easy, at some stage we will see a sharp rally leading many to start thinking that “a bottom has been reached” and giving a nice false sense of a new bull market. I warn you to be sceptical; I don’t see any market bottom in any major index until at least early 2009. The financial sector is often referred to as “cheap” however, other than for a short term trading bounce I would not invest a penny of my money in financial shares.
How can many claim that financials such as Citibank, UBS, Barclays or Deutsche Bank are cheap when even the companies themselves cannot value their own assets? Buying into financials now is like buying a car with a candle in the middle of the night without a test drive, you may get lucky in the morning and find you have done a great a deal, or most likely you have just bought a pile of Junk. At some stage I do want to increase exposure and I know the Banks I would like to own, but it’s not that time yet. Whilst everyone reading this is no doubt sick of hearing about banks exposed to Subprime Mortgages I still think that banks have even worse financial problems to come yet including credit card debt, home equity loans, commercial real estate loans, commercial and development loans and other derivatives that we just don’t know about yet.
One final word on short selling – use a stop if you are trading via a spread bet, even the best researched short trade can continue to go up. Also using a covered warrant PUT is the safest way to go short, your worse case scenario is that the warrant expires at 0 and you cannot be stopped out.
Vince Stanzione has produced a home study course to teach private investors how to benefit from trading financial Spread Bets and Fixed Odds priced at £347. For more information please visit www.fintrader.net or telephone 01189 47 66 30 (24hrs)
