Short selling is a bearish and highly aggressive trading strategy on a stock, index, or any underlying instrument, such as commodities and bonds. A trader who pursues a short-selling strategy believes the shorted stock or instrument will decline in price. The profit made via short selling is the difference between the price at the time of the short and the price when you decide to cover in what is known as short covering. If the short price is greater than the cover price, you make money.
Sometimes something that is viewed as ugly by one person is absolute beauty in someone else’s eyes. This is what the phrase “beauty is in the eye of the beholder” represents.
The same argument can be used in analyzing stocks. For instance, when I examine stocks, I will look at companies that are considered the dogs of Wall Street. These stocks generally are characterized by significant short selling, which means the market is betting against them.
Yet as the phrase suggests, there are stocks that are in the dumpster but have great upside potential for those who see the positives in the stock and have an appetite for risk. If they are right about the positive outcome, they can make some good profits.
A perfect case of this is with nutritional products company Herbalife Ltd. (NYSE/HLF). Hedge fund manager Bill Ackman simply hated the look of Herbalife and suggested the company is a pyramid scheme.
Ackman took out a large short selling position on Herbalife hoping to cash in on his perception of the company’s ugliness.
Then in comes investment guru George Soros who has made tons of money in his life. Unlike Ackman, Soros saw the beauty of Herbalife, and so he added a position.
I’m not sure if Ackman has been covering his short selling in Herbalife, but if he hasn’t, he will lose tons of money. As the chart below clearly indicates, if he did not cover his short selling, there are probably many unhappy investors in his fund.
Take a look at the chart below of Herbalife. Note that the stock plummeted in December 2012 to … Read More
Oil drives the world.
But the problem now is that the industry is building up an excess inventory in available oil while global demand is dwindling, as the global economy continues to struggle with the aftermath of the Great Recession in 2008. The result: lower oil prices.
Some argue oil prices will easily rally back, but I’m not convinced, based on both the fundamental and technical pictures.
On the chart, the near-term technical outlook for oil prices is bearish. Spot oil prices are below $90.00 a barrel for West Texas Intermediate (WTI) oil, and they’re edging lower to the mid-$80.00 range.
Spot oil prices have recorded 10 new lows and five new highs over the past three months, according to data from Barchart.com. Over the past year, spot oil made 21 new lows to go along with only eight new highs. It’s clear that the market bias is negative on oil prices.
Based on the spot high of $106.16, reached on May 1, 2012, the spot WTI oil price is down 18.3% as of Thursday, which is nearing the official definition of a bear market.
The chart of the WTI spot oil price below shows some indecision, according to my technical analysis.
Chart courtesy of www.StockCharts.com
The fundamental side is also helping to confirm a potential downward pressure on oil prices.
We all know that oil is one of the most volatile of the commodities, fluctuating with the prospects of the global economy and, of course, the happenings in the Middle East.
On the supply side, there is some calm in the Middle East, but the tensions in North Korea … Read More
Traders bearish on stocks often employ a short selling strategy and hope the stock subsequently declines in value, thereby profiting off of the difference between the initial shorted price and the lower price at which the short trader hopefully buys back the stock.
While some argue that stocks with large short positions are bearish, I would counter that by saying heavy short selling means there’s an opportunity to make money on the stock.
When a shorted stock with heavy short selling begins to rise in value, you will likely see a big influx of short sellers moving back into the market and buying back the shorted stock to replace the initial position. If enough short sellers do this, a short squeeze would likely materialize, helping to drive up the price of the stock in the market.
So while stocks with heavy short exposure are viewed as bearish by many, I often take the contrarian view and look at these heavy short stocks as long opportunities to make some quick money.
A classic case of a short squeeze is the shares of Groupon, Inc. (NASDAQ/GRPN). Trading at $2.60 in mid-November, the stock has since surged 150%, and part of this upward move was driven by the significant short exposure in the stock. As of March 28, 2013, there were 41.7 million shares shorted on Groupon, or 20.1% of the float.
Chart courtesy of www.StockCharts.com
Groupon is just one example of a stock with heavy short selling exposure, but there are many others.
Two of the top-five short selling positions as a percentage of the float are Tesla Motors, Inc. (NASDAQ/TSLA) with … Read More
Bearish traders tend to short stocks and/or the equities market. While stocks subject to short selling are viewed as negative, I often take the contrarian view, and look at these shorted stocks as a possible buying opportunity due to the short-covering possibility.
Let me explain. With short selling, a trader disliking a particular stock would short the stock by borrowing the stock from his or her broker and selling it in the market at the prevailing price. The short-seller hopes the stock falls in price. For the short-selling strategy to pan out, the short stock must drop in price so that the short-seller can buy it back at a lower price and replace the borrowed position to the registered holder. The short-seller would profit.
In my view, looking at heavy short-selling stocks is a strategy to buy a stock that could have more potential than what the short-seller thinks. By taking this contrarian short-selling approach, you can often discover stocks that may be set for a short-covering rally in which you can profit.
For instance, online leader Google Inc. (NASDAQ/GOOG) is trading at over $800.00; however, investors continue to like the stock, as there are minimal short-selling positions on the stock at 1.6% of the float, or 1.4 million shares, as of February 15, 2013. (Source: Thomson Financial, last accessed March 14, 2013.) But note that a month earlier, there were 3.28 million short shares on Google, so the stock attracted some short-selling covering that helped to drive the stock higher, based on my stock analysis.
I normally would not look at a stock like Google as a short-selling buying … Read More
For all of you who are attracted by the battered price of Facebook, Inc. (NASDAQ/FB), I suggest you keep on reading: Google Inc. (NASDAQ/GOOG) is the top player in the Internet space, in spite of it hitting an all-time record high of $776.60 last Friday, and here’s why.
My stock analysis indicates that some of you may feel that, at nearly $800.00 a share, Google is valued at way too lofty a price. Moreover, some may be spooked by the recent collapse of Apple Inc. (NASDAQ/AAPL) on the price chart after trading at over $705.00 a share in September 2012. What I would say to you is that Google is not Apple, and it’s definitely a much better company than Facebook, based on my stock analysis.
In fact, I think Google has more of an opportunity to reach $1,000 than Apple. Of course, that is if Google doesn’t undergo a stock split. I recall when Google first debuted in August 2004 at $100.00 a share, when I was debating in my mind whether the stock was a highflier or the real thing. At that time, Internet stocks were really still in their infancy.
The stock chart for Google below shows the stock’s upward trending channel and strong relative strength. But you need to be careful, as the stock could decline back to the area defined by the blue circle between $715.00 and the current price. A retrenchment into this space could signal a buy, based on my technical analysis.
Knowing what I have learned over the past eight years, I wish I had picked up some shares of Google; but … Read More