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Why It’s Finally Time to Short Stocks

By Jeff Clark
Friday, January 12, 2007

It’s finally time to get short.
 
Last week, I warned that even though we were seeing multiple “SELL” signals from many technical indicators, it was still too early to get aggressive on the short side. Buyers were too willing to jump in on any sign of weakness and keep upward pressure on stock prices.
 
Patience was the name of the game last week. This week, patience paid off.
 
The Dow Jones Industrial Average is 116 points higher. The S&P 500 is up 14 points. The Nasdaq composite gained a whopping 50 points. The Nasdaq 100 tacked on 49. And the puts I was looking at purchasing last week are 50% cheaper today.
 
A large part of the reason I stayed away from the short side last week – indeed for most of the past month – has to do with CNBC. The analysts that appear on CNBC provide an excellent measure of investor sentiment. While most analysts claimed to be bullish, they hedged their opinions with something like, “... we may see some weakness in the short term...”
 
I, too, have been looking for some weakness in the short term. Apparently, so has everyone else. And if there’s one thing I’ve learned after playing this game for more than 20 years, it’s that whenever my opinion is mainstream, my opinion is wrong.
 
So despite the sell signals from the Nasdaq Summation Index (NASI) and the Nasdaq Composite Bullish Percent Index (BPCOMPQ), and despite the ridiculously low level on the Volatility Index (VIX), and despite the underperformance of the semiconductor index (SOX), and despite the massive amounts of insider selling, and despite my overwhelming conviction that the market was headed for a correction, I held off going short the market.
 
Until yesterday.
 
Yesterday, CNBC could have aired an all-day video of the annual Running of the Bulls ceremony in Pamplona, Spain, and it still wouldn’t have matched the amount of bullishness coming from their guest analysts.
 
“You have to buy this market!” cheered one gleeful matador.
 
So, after six months of vertical stock price action, after multiple sell signals from my favorite technical indicators, and after registering the most overbought conditions we’ve seen since early 2000, the analysts are stark raving bullish?
 
It would be nice to have a red cape and a sword.
 
Come to think of it, it would be nice to have some puts.
 
Best regards and good trading,
 
Jeff Clark




Market Notes
The big tech money flow continues... new highs for Hewlett-Packard, Cisco, Level 3, and Microsoft.
 
Strong day for retail: Nordstrom, Liz Claiborne, Aeropostale, and Ross all hit new highs.
 
Big Pharma continues to rally... new high for the PowerShares Dynamic Pharma Fund.
Market Watch
Symbol Price
Change
52-Wk
S&P 500 1221.53 +1.3% +10.1%
Oil 37.77 +1.5% -2.8%
Gold 135.20 -0.1% +13.4%
Silver 27.93 +0.4% +47.9%
US-Dollar 80.67 -0.8% +8.1%
Euro 1.32 +0.6% -12.1%
Volatility 19.39 -9.2% -8.2%
Gold Stocks 564.53 +1.3% +10.6%
10-Year Yield 3.00 +1.4% -9.6%

World ETFs
Symbol Price
Change
52-Wk
USA 122.56 +1.3% +10.2%
Canada 30.44 +1.3% +13.8%
Russia 21.63 +2.3% +16.7%
India 37.73 +1.9% +20.0%
Israel 16.47 +0.9% +9.7%
Japan 10.58 +1.0% +7.4%
Singapore 13.88 +1.0% +19.2%
Taiwan 14.72 +1.6% +17.8%
S. Korea 56.56 +1.7% +22.8%
S. Africa 70.85 +3.9% +22.9%
China 45.06 +1.4% +0.1%
Lat.America 52.82 +1.4% +6.7%

Sector ETFs
Symbol Price
Change
52-Wk
Oil Service 136.18 +1.5% +14.8%
Big Pharma 64.13 +0.6% -3.3%
Internet 72.13 +0.7% +22.3%
Semis 16.03 +2.1% +28.9%
Utilities 31.21 +0.3% +1.6%
Defense 18.51 +1.3% +10.1%
Nanotech 9.99 +1.3% +0.0%
Alt. Energy 9.95 +1.4% -4.4%
Water 18.31 +1.1% +12.2%
Insurance 16.07 +1.2% +18.3%
Biotech 20.58 +1.1% +27.1%
Retail 19.65 +0.1% +28.4%
Software 24.59 +0.9% +24.1%
Big Tech 53.73 +1.0% +21.9%
Construction 12.99 +2.1% +13.3%
Media 13.57 +1.1% +25.0%
Consumer Svcs 67.26 +0.8% +23.3%
Financials 54.87 +2.4% +5.2%
Health Care 64.22 +0.7% +1.3%
Industrials 63.25 +1.6% +19.7%
Basic Mat 73.57 +1.6% +21.6%
Real Estate 55.24 +1.4% +23.8%
Transportation 91.17 +1.4% +25.6%
Telecom 22.48 +1.1% +17.1%

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