NakedPuts00

Alex Elder is good stuff.

I don't short individual companies very often, but if I were to do so, I would want to look at short interest relative to average daily volume. High short interest companies are prone to short squeezes, and if the interest is high relative to average volume, then those could be dramatic.

The other thing to be concerned about is that shorts tend to require more attentive rebalancing if you hold them for any length. As your shorts work, they become a smaller and smaller percentage of your portfolio exposure, and if they go against you, they become a larger and larger percentage of your portfolio exposure. This is just the opposite of a long position, and so if you are used to going long only, you may want to short in 1/2 or 2/3 the size you would be inclined do, until you get used to it.

If you are running a long-short portfolio, the rebalancing is especially important, or else you end up taking a lot more or less market risk than you expect.


As for technicals, I think this is a market where tecnhical analysis is particularly important, simply because the fundamentals are so difficult to fathom given the macro uncertainties that people end up having to rely on technical levels as the only way to try to get a handle on stuff.

For example, I've been trying to figure out what a fair value for the S&P 500 index would be. The answer is SO dependent on the assumptions (like is the market risk premium 4.9% or 5.0% - is the expected earnings growth rate 5.5% or 5.75%) that the fundamentals aren't much help. All we can do is say "well, people started feeling better around this level last time, maybe they'll mount a stand at this same level as we pass it again.".



Edited 1 time(s). Last edit at Wednesday, August 10, 2011 at 05:36PM by bchadwick.