Pick Good Candidates to Short
The major indices have dropped a long way since mid-May, but it still isn't too late to sell short. Many of the sectors that held up well in the last month are now rolling over and joining their weaker cousins in notable declines. So get in there and take the short-sale plunge so you don't get left out while the market is rewarding this classic strategy.
This is related to the dangers of "short overcrowding." Simply stated, many traders notice that a stock is falling hard, and they mindlessly jump on board. Sooner or later, that side of the market gets filled to the brim with weak-handed players trying to grab the low-hanging fruit.
These short-sellers create buying power because they're nervous nellies -- easy to shake out. Contrarians see the telltale signs of short overcrowding and target those markets in an effort to force the crowd into a covering panic. It's no different than a few cows in a big herd getting freaked out and starting a massive stampede.So tread lightly when looking for new short sales, and focus on stocks that show the characteristics of impending declines, rather than ones already stuck in big downtrends. There's less competition, and you'll be covering your trades for decent profits just as the crowd notices the selloff and starts to chase it into yet another overcrowding scenario.
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