Monday, April 15, 2013

Just Call me Shorty Shorterson... or "Shorty" for Short

A stock trading strategy that I have been interested in for some time is short positions.  To short a stock means that you "sell" a position now, with the intention of "buying" it back later, at a lower price.  I think the whole thing is quite bizarre, really, but since it exists and is available, who am I to question the practice?  Obviously, you do this when you think the stock will move down in price.

Some reasons for my interest include:
- Fear is stronger than greed.  What this means for the stock market is that, in a nutshell, when a stock is rising in price, it rises relatively slowly, and when it drops in price, it drops relatively quickly (because people panic when they see their profits disappearing, and they sell out quickly).  The generally agreed upon "normal" breakdown is that stocks trend upwards 2/3 of the time, and trend downwards 1/3 of the time.  Put another way, if you successfully short stocks, you can make the same amount of money, but in half the time.
- I have noticed that once a stock starts to crater, it craters pretty consistently (there’s the fear thing) until it finally stops and reverses... unlike up-trends which can be much more sloppy and hard to read.  When you see a down-trend on a stock, you can be pretty confident it will continue for a while (note that it has to be a "trend" - one or two daily bars don’t make a trend!).  This is more likely true for stocks for weaker companies and/or companies which do not pay dividends... the strong, dividend payers tend to stay stronger.
- At times when the market is weak, the chances to make money the "normal" way (by holding long positions), are slim to none.

Of course, shorting a stock can be risky; a stock can rise in price infinitely, meaning that your potential losses are infinite if you don’t manage your trades closely (the most you can lose on a long position is the amount you initially put in).  Many traders (and all investors) stand by during the down-trends, or hold onto their long positions for when they will recover after the down-trend.  I don’t want to stand by and wait, and the "hang on and wait for recovery" strategy makes my blood turn to ice when I watch my positions shrink and shrink and shrink.

As I am trying to train myself to be a successful stock market trader (mostly "position trader", occasionally "swing trader"), short positions sound very appealing to me.  In December 2012, when I plotted out my "training plan" for 2013/2014, I set myself a goal of dipping my toes into a short position by March of 2013.  As I’m such a keener, though, I opened my first short position on January 31, 2013, with Kinross Gold (K). The stock moved sideways, and I got nervous, and I closed the position on February 8th.  Although I didn’t make (or lose) any money on the trade, I was thrilled.  I had successfully gotten in and out of a short position, which actually wasn’t that easy since my broker, Questrade, often doesn’t have enough of particular stocks at hand to short (ie. when I try to open short positions, the orders often get refused because there’s no ‘inventory’ from which to short).

The best time to short stocks is when the stock MARKET is in a down-trend... not just the individual stock.  People stampede for the door, and lots of stocks crater at the same time, regardless of how strong they "should" be if the market were a place of reason.  I piddled around with some short positions, but around late March is when things started to get interesting.  The TSX (where most of the stocks I watch live) had done a beautiful up-trend from mid-November until late January when it started softening... moving sideways... sometimes down, sometimes up.  I thought perhaps a top was forming, and a down-trend was coming.  Seasonally, we often get a down-trend in the stock market around April or May, so the timing seemed about right as well.  I started paying a lot more attention and looking for signs and confirmations of a down-trend in the market.

A safer way to "short" the market, and the only way possible from within an RRSP or TFSA account, is to buy long positions in "Inverse" ETFs ("inverse" meaning that the ETF itself shorts the market, but you, yourself, are holding a long position in that ETF).  Opening a position in one of those ETFs means you think the stocks they include will go DOWN - as those stocks go down, the ETF itself goes UP.

So, as I was watching the market for a confirmation of a down-trend, I was also scouting for stocks to short (in my Margin account), and Inverse ETFs to purchase (in my RRSP account).

On March 25th, the TSX took a fairly big drop down, and by March 28th, the 10, 20, and 30-day Moving Averages crossed over from an "up-trend" configuration to a "down-trend" configuration.  I took that as my cue to jump in (although, I was well aware that it could easily be a correction, and the market which had been so strong for so many months previously could just reverse again and happily resume its up-trend).

Today, as I write this, I am having my first-ever WOO-FREAKIN-HOO day with the stock market.  Since March 28th, the market has taken a couple more serious drops down.  My short positions gapped down, and my Inverse ETFs, largely, gapped way up.  I set tight stop-loss orders on the ones that gapped significantly so that I didn’t lose my profits if/when those stocks (and ETFs) pulled back (maybe even closing their gaps).

Many of my positions have been closed out today on my protective stops, as follows:
- Osisko Mining Corporation (OSK): Short position opened on April 4th at $5.52.  Increased on April 11th at $5.54.  Closed today at $4.04 for a profit of approximately 26%.
- Silver Standard Resources (SSO): Short position opened on April 4th at $9.50.  Increased on April 5th at $9.82.  Closed today at $7.88 for a profit of approximately 18%.
- HGD (Inverse ETF on Gold stocks): Position opened on April 3rd at $16.00.  Closed today at $21.83 for a profit of approximately 35%.
- HZD (Inverse ETF on Silver stocks): Position opened on April 5th at $5.74.  Increased on April 11th at $5.52.  Closed today at $7.41 for a profit of approximately 31%.
- HBD (Inverse ETF on Gold Bullion): Position opened April 3rd at $14.04.  Closed today at $17.88 for a profit of approximately 25%.

At this time, I still think the TSX, and the precious metals, will keep moving downward, at least for a short time (although I agree, and heed, those who say gold is about to bottom and reverse).  Once the dust has settled, I will look to possibly re-open some positions (hopefully after a pull-back)... assuming the trend continues.

Through my learning process of the past several months, I have had some great mentors and teachers who all have different approaches and perspectives of their own.  As one of them might say (you know who you are), "good luck to me!"

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