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Short on Value: Could a massive short squeeze put equity bears in danger?

Posted July 28, 2008

Short on Value: Could a massive short squeeze put equity bears in danger?Record short selling positions could spell explosive upside surge potential for the world equity markets. Tune in to the Market Buzz…

 

by J. Christoph Amberger

Baltimore — (TFN): Worldwide, more than $1.4 trillion of equities are now on loan to short sellers. That’s about 33% more than at the start of 2007.

Now, short-selling a stock involves borrowing shares to sell them on the expectation that they can be purchased at a lower price before you have to pay back the loan. The lower the share price falls, the less you have to pay to replace it… and can pocket the difference.

***View the video!

In short sales, upside and downside are reversed. Unless you set certain stop losses and consider just the money you put at risk your principal, you can never make more than 100% on a short trade. And even that requires the stock to simply vanish — something that happens far more rarely than certain newsletter editors would make you believe when they sell you on their services.

But while your upside is limited, your risk is not. Pick the wrong stock and you could have to replace your borrowed shares at 10… 50%… maybe even 1,000% of the price you sold them at.

***Analysts predict that oil could trade at $175—or even $225—by December. But insiders and hedge funds are betting serious money on falling prices. Find out how to follow the smart money…

 At TodaysFinancialNews.com, we use short recommendation sparingly for just that reason.

There is a certain irony to the correlation of short selling and bullish market moves. With trillions of dollars now parked in borrowed stocks, it is possible — if not probable — to see an accelerated upward move in the markets. When short sellers with low risk tolerance are forced to cover their positions, a sudden surge in trading volumes can push up entire indexes by double-digit margins in a single day. On July 16, short covering was responsible for a 12-percent spike in the S&P 500 — its  biggest-ever gain.

When fund managers and other desk jockeys talk about shorting, they like to compare themselves to lions and other apex predators who’re weedin’ out the weak from the herd. In my experience, they more resemble turkey vultures on a possum carcass… likely to take flight and scatter at the first sign of trouble.

A trillion bucks in shorts says we’ll be seeing a massive — if limited — upward spike in the markets before long. This is the time to add some index calls to your speculative portfolio.

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Posted by J. Christoph Amberger · Filed Under Featured Video, Podcast, US Stocks and Markets, Videos 

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