Most folks really have no business shorting stocks.
The stock market goes higher over time. Shorting it means going against that trend. And, most folks will lose money doing so.
Instead, when stocks are priced at historically high fundamental valuations, technical conditions are far stretched into overbought territory – and investors are throwing money at every silly idea promoted on internet chat rooms – most folks are better off grabbing a seat on the sidelines.
They can watch, comfortably, as the inevitable correction runs its course. Then, they can put money to work in the stock market at lower prices.
But, every once in a while, conditions line up in such a way that it makes sense for the average investor to make a small bet that stock prices will fall.
This is one of those times.
Much of what’s happening in the stock market this year is typical of what happens right before a significant correction. It’s not just that investors are willing to pay premium prices to buy stocks. It’s that they’re doing things with their money that, years from now, they’ll look back and say, “Gosh, that was stupid.”
For example…
By now, just about everyone knows about the GameStop (GME) saga…
Shares of the struggling video game retailer started the year below $25. But, they traded as high as $483 earlier this month. The 1,800% return was not the result of skyrocketing video game sales, a surge in profitability, or some new productive makeover of the company. GME blasted higher because a bunch of novice traders decided they were going to stick it to “the man.”
Of course, the YOLO (You Only Live Once) crowd didn’t consider that it might have actually been “the man” that started the GME chatter in the first place. By the time the dust settled, “the man” had a few extra billion dollars. And, most of the YOLO traders were still sitting on the couch in their parents’ basements waiting for the next round of stimulus checks.
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And, if the first season of the GameStop soap opera wasn’t enough… The second season started this week.
So now, let’s also consider the absurd action in Special Purpose Acquisition Companies (SPACs)…
SPACs were formed to help create a liquid environment for small companies in need of capital investment. They’ve morphed into incredibly speculative vehicles that chase the hottest investment trend and pay top dollar for anything associated with the concept.
Folks are willing to throw so much money at anything calling itself a SPAC that just about anyone with any sort of name recognition is getting in on the action. Earlier this month, for example, former baseball superstar Alex Rodriguez launched a SPAC to raise $575 million. Shaquille O’Neal recently teamed up with some former Disney executives to launch a $300 million “Shaq SPAC.” Heck, even Snoop Dogg was able to raise over $100 million for his SPAC.
Speaking of dogs, and further noting the recent absurdity in the financial markets, let’s talk about the cryptocurrency Dogecoin…
Dogecoin was created as a joke. But, it’s a joke that’s up over 1,000% in the past two months. Folks are more than happy to trade dollars – which can be used to buy just about anything and anywhere in the world – for an alt-currency featuring the picture of a smiling dog… Which can only be used to “tip” other people who have the same currency.
This is not the sort of stuff that happens at the start of a new bull market in financial assets. This is what happens near the end of one.
This is what happens when folks no longer care about the risk of an investment. They don’t look at the potential to lose money. Instead, they focus on how much they can possibly make. And, they worry more about missing out on gains rather than possibly suffering a loss.
This is when the stock market is most vulnerable to a decline. And, it’s when most traders should raise cash, take a seat on the sidelines, and wait for a better opportunity to put money to work.
Aggressive traders, however, should consider speculating on a downside move.
Like I said, most folks shouldn’t short stocks. It goes against the trend. And, most folks will lose money doing so.
But, every once in a while, the conditions line up in such a way as to make shorting stocks a reasonable speculation. And this is one of those times.
Best regards and good trading,
Jeff Clark
Reader Mailbag
Will you be taking Jeff’s suggestion on going against the current trend and shorting stocks? Why or why not?
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