If you’ve followed the commentary on my recent equity long positions like $GOOG or $LNKD, then you’ve probably heard me asking those who insist on shorting big winners “Why pick a fight with the strongest guy in the room?”
Let me just say, I understand we all have different timeframes and objectives, and I can appreciate that in theory it’s still perfectly possible for you to make money getting in and out of your short trade while I hold through the noise for a long-term gain on my long. We have opposing positions and both walk away winners. It can happen.
But really, if you’re going to play that game, would it not make more sense to short the stock of a company that is struggling with outdated or obsolete products, or who missed on earnings and guided lower, or who just broke a major support level and is in a relentless downtrend? Because otherwise it suggests to me the only reason you’d short a stock that had none of those characteristics is because, wait for it, it went up so much.
Let me introduce you to someone.
This is Žydrūnas Savickas. Have at it, spell check.
He’s 6ft 3in, 390lbs, and he’s the world’s strongest man. To you and me he’s Google ($GOOG).
You want to take him on? Are you nuts? Just look at him! He’s in a solid uptrend, he’s gone from $650 to nearly $850 in 4 months, he’s been at all time highs for over 3 weeks, and he’s still looking strong with 10 of the last 20 days being accumulation days, and no sign of divergence on a daily or weekly basis. You’re crazy.
I can’t watch, I don’t like the sight of blood, I’d pass if I were you.
Let’s try someone else. What about this guy? He looks new, probably fairly green, we could take him on.
Hang on a minute, you haven’t laid a finger on him and he’s laughing at you. It says here his name is LinkedIn ($LNKD), but his friends call him “The Train.”
Can you believe this guy? He’s actually laughing at you for challenging him.
Mind you, he does have a point, look at that huge high-volume gap he made, and he just kept on going, crushing all these poor people who couldn’t see an uptrend and wouldn’t get out of the way. Apparently people were pointing at his P/E or something, but he just ran them all down muttering something about Amazon?
I think we need to be realistic here. Let’s pick on someone who doesn’t look like a bouncer at a strip club.
What about this guy? Alright, now we’re talking. Look at this wimp.
Pleased to meet you Cliff, we’d like to beat you up. We’ve seen a lot of people that were short-sellers get beaten up by the last two guys, but my friend here thinks you’re more the kind of person we should be picking a fight with.
Let’s take a look at what he’s got. OK, this is more like it. He’s dying a slow painful death, an entrenched downtrend, big volume all the way, bringing him under more and more pressure, with no bullish divergence. One decent punch and this kid is gonna collapse. This could be our guy. Are there any others?
Yeah, this is a good one. I’ve seen this kid on TV a lot recently too. Jay Penney, goes by the initials JC.
Supposedly used to be something special years ago but he’s been in a death spiral ever since. Got some rich benefactor though that thinks the world of him and gets into fights on TV defending his reputation. They’re all in denial. Crazy.
Chart tells the story.
You been to their stores? No, neither has anyone else, that’s the problem. Stock closing in on the lows of over 4 years ago, one more knock and it’s over.
People talk about it bouncing to its 200-day, it will be lucky to last 200 days.
But seriously… you want to short a stock? Don’t pick on the winners, strength begets strength. Pick on the losers.
Dennis Gartman phrased it well in one of his trading rules and guidelines:-
“Metaphorically, when bearish, throw your rocks into the wettest paper sack, for they break most readily…”
Imagine the fear that’s going through the minds of the people still holding $CLF and $JCP, couldn’t you use that to your advantage? Now imagine the state of mind of someone still long $GOOG or $LNKD. There’s no comparison.