When Short Selling Goes Wrong
Talking about this year’s short-selling losers, Gilani repeated the useful adage: “Bulls make money and bears make money. Pigs get slaughtered.”
Gilani said the approach to successful short selling in this “aging bull” has to include discretion – and that’s where the big-name investors failed.
According to Shah, “the big short players who got trounced – Ackman was the biggest loser – were exceedingly arrogant… they forgot the golden rules. Never take on a position so large that other traders can force your hand, to be forced to sell or cover your short. No person is bigger than the market.”
Shah added that ostentatious short sellers make for attractive targets themselves.
“When you take a short position with 25% of shares outstanding, you’re inviting me to squeeze you. You’ll have a lot of shares to buy back if the trade goes against you.”
Also, this year’s short sellers forgot about the U.S. Federal Reserve.
The “Un-Shortable” Market of 2013
U.S. gross domestic product (GDP) grew by 2.5% in the second quarter. That kind of growth just isn’t worth writing home about, not when China is putting up numbers like 7.7%.
The “official” unemployment figures keep improving, but are still high. And the dismal “real” U6 figure is more than 14%.
What’s propelled this market higher despite all the economic reasons for it to fall is that the Fed has the money-hose on, full bore. And, brother, it is still raining.
This is why markets rallied even with slow GDP growth. That’s why the market sees what can only be described as terrible unemployment figures, which show more than 7% of Americans aren’t working, and a rally follows.
The Dow has tacked on nearly 73%, and the S&P 500 nearly 83%, since quantitative easing (QE) began five years ago.
In the end, a five-year bull market, almost completely divorced from economic reality, just doesn’t turn on a dime. And we haven’t seen any of the truly market-thwarting events that might open the gates for a bear run.
But this 54-month bull market will not have the Fed to power it forever… Here’s what investors should look for going forward.
Short Selling in an “Aging Bull”
Effective short selling requires the proper attitude, the proper perspective – and a willingness to stay off the radar.
Gilani said, “At Capital Wave Forecast, we made small, defensive bets and took small losses. And so we had some triple-digit winners when our shorts worked out. But we took our profits quickly. We were lucky; the bull turned our positions around and they’re mostly higher now. You can’t get greedy picking tops or bottoms, like Ackman did.”