Saturday, October 05, 2002 5:08:00 PM
EARLIE OF SI ON PICKING SHORT CANDIDATES
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#reply-18076758
- Lay-offs are the key. If they continue to expand (and currently, they continue to do just that), the economy will continue to contract.
- We are in a bear market hence the trend is down. No use wasting time looking for winners (yet) as shorting/putting aligns one with the primary trend.
- A contracting economy crushes sales and profits. Reduced profits make it more difficult to service debt. Unserviced debt leads to bankruptcy court. Companies that tread this path experience "substantial" stock price erosion.
- While most companies are debt encumbered, some are drowning in it. Track down the latter.
- Narrow one's "deeply debt laden" list further by selecting only those where the cash flow won't (or soon will not) allow debt servicing.
- Be especially interested in those where accounting baloney has provided the stock price support.
Yes, I do a great deal of cross-country travel to keep tabs on economic activity (primarily in the tech sector) but most of the above can be accomplished in the comfort of one's home via one's PC. Checking the 10 Qs and 10 Ks has never been a more valuable activity than it is today.
I have received a large number of PMs about shorting from lurkers (which in and of itself has me worried about the near term). Here are a few ideas (acquired through very expensive and painful experiences) that I know veteran bears on this thread try to keep in mind.
- Be patient. Avoid shorting on "down days". Wait for the rallies and short into them. Bear market rallies are sharp and violent. Usually they appear out of nowhere and give little warning. Shorting the backside of these rallies lowers risk dramatically.
- Don't try to get the whole "down" move. A chunk taken out of the middle of a stock price move is the safest chunk. Entering after a rally has petered out and exiting well before the next rally begins, lowers the risk.
- Whenever Mr. Market provides solid, short term profits, ALWAYS book most/all of them. Yes, there will come a day when it will prove to have been the wrong thing to do, but meantime the bank account is heading the right way.
- A Bear market destroys almost as many bears as it does bulls, primarily through violent rallies/short squeezes. They are to be avoided like the bubonic plague. Take small early losses rather than large late losses.
- Make much smaller (percentage of account) bets in a bear market than in a bull market. Keep larger cash balances (percentage of account) in a bear market (the inherent risks are MUCH greater).
- A bear market is a non-discriminating hunter. It is well-armed and it takes no prisoners. It would just as soon destroy bears as bulls. Being a bear does not equate with wearing a flak jacket or carrying a weapon, hence it makes much sense to spend much of one's time hiding out. Playing hide-and-seek with Mr. Bear Market is best done only when the odds are heavily in one's favor. Brave bears are dead bears.
- Use Mike Burke's "thirds" approach when entering positions (this is one of the best of many of his ideas that I have shamelessly swiped).
- Forget ego when going short. Mistakes only kill when they are not disposed of quickly.
- Put premiums have become huge. Buying puts that are very expensive is betting that a BK is near. So far, the evidence at hand supports the continuance of a "grind-down" scenario rather than a BK. A small short position may provide a better opportunity to make a profit. Puts make sense when a rally enjoys an extended life and the premiums shrink.
- Markets always "overshoot" and gravity is potent. Given the excesses of the preceding mania, it is likely that the current bear market is in its infancy. Before it is over it will likely dust off even veteran, surviving bears who succumb to the bullish siren song too "early". When the whole world hates the very word "stock" it may still be too soon to leave the fox hole. Not a good thing to be the last fatality of a long war, as "dead" is still "dead".
Best, Earlie
MDA Thread #board-1320
Turnips Thread #board-1125
Trading Info #board-1220
Retrace #board-1345
PPT #board-1280
http://www.angelfire.lycos.com/goth/augieboo
-----------------------------------------------------------
#reply-18076758
- Lay-offs are the key. If they continue to expand (and currently, they continue to do just that), the economy will continue to contract.
- We are in a bear market hence the trend is down. No use wasting time looking for winners (yet) as shorting/putting aligns one with the primary trend.
- A contracting economy crushes sales and profits. Reduced profits make it more difficult to service debt. Unserviced debt leads to bankruptcy court. Companies that tread this path experience "substantial" stock price erosion.
- While most companies are debt encumbered, some are drowning in it. Track down the latter.
- Narrow one's "deeply debt laden" list further by selecting only those where the cash flow won't (or soon will not) allow debt servicing.
- Be especially interested in those where accounting baloney has provided the stock price support.
Yes, I do a great deal of cross-country travel to keep tabs on economic activity (primarily in the tech sector) but most of the above can be accomplished in the comfort of one's home via one's PC. Checking the 10 Qs and 10 Ks has never been a more valuable activity than it is today.
I have received a large number of PMs about shorting from lurkers (which in and of itself has me worried about the near term). Here are a few ideas (acquired through very expensive and painful experiences) that I know veteran bears on this thread try to keep in mind.
- Be patient. Avoid shorting on "down days". Wait for the rallies and short into them. Bear market rallies are sharp and violent. Usually they appear out of nowhere and give little warning. Shorting the backside of these rallies lowers risk dramatically.
- Don't try to get the whole "down" move. A chunk taken out of the middle of a stock price move is the safest chunk. Entering after a rally has petered out and exiting well before the next rally begins, lowers the risk.
- Whenever Mr. Market provides solid, short term profits, ALWAYS book most/all of them. Yes, there will come a day when it will prove to have been the wrong thing to do, but meantime the bank account is heading the right way.
- A Bear market destroys almost as many bears as it does bulls, primarily through violent rallies/short squeezes. They are to be avoided like the bubonic plague. Take small early losses rather than large late losses.
- Make much smaller (percentage of account) bets in a bear market than in a bull market. Keep larger cash balances (percentage of account) in a bear market (the inherent risks are MUCH greater).
- A bear market is a non-discriminating hunter. It is well-armed and it takes no prisoners. It would just as soon destroy bears as bulls. Being a bear does not equate with wearing a flak jacket or carrying a weapon, hence it makes much sense to spend much of one's time hiding out. Playing hide-and-seek with Mr. Bear Market is best done only when the odds are heavily in one's favor. Brave bears are dead bears.
- Use Mike Burke's "thirds" approach when entering positions (this is one of the best of many of his ideas that I have shamelessly swiped).
- Forget ego when going short. Mistakes only kill when they are not disposed of quickly.
- Put premiums have become huge. Buying puts that are very expensive is betting that a BK is near. So far, the evidence at hand supports the continuance of a "grind-down" scenario rather than a BK. A small short position may provide a better opportunity to make a profit. Puts make sense when a rally enjoys an extended life and the premiums shrink.
- Markets always "overshoot" and gravity is potent. Given the excesses of the preceding mania, it is likely that the current bear market is in its infancy. Before it is over it will likely dust off even veteran, surviving bears who succumb to the bullish siren song too "early". When the whole world hates the very word "stock" it may still be too soon to leave the fox hole. Not a good thing to be the last fatality of a long war, as "dead" is still "dead".
Best, Earlie
MDA Thread #board-1320
Turnips Thread #board-1125
Trading Info #board-1220
Retrace #board-1345
PPT #board-1280
http://www.angelfire.lycos.com/goth/augieboo
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