The Trouble With Shorting

One, Cramer says, is that somebody has to sell on the bad news, and two is that you have to cover them on bad news.
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So why don't stocks go down when they are supposed to? Let's go back to the

Dell

(DELL) - Get Report

situation and augment it with the

Knight/Trimark

(NITE)

trading. Dell got downgraded; Knight had number cuts. On both, my instincts were to buy, for one reason only --

the stocks are too heavily shorted

.

As is so often the case in this overhedged fund world we are in, calls leak out, people press bets, and puts and shorts get done with reckless abandon. I know a lot of people are short Knight and Dell.

There are two problems with shorting: one is that somebody has to sell on the bad news, and two is that you have to cover them on bad news. (Unless you are a long-term short-seller, of which there are very few.)

Both of these calls, the Dell downgrade and the Knight number cut, did not produce the desired effect of panicked,

Avon

(AVP) - Get Report

-like selling. They just didn't reach that threshold.

That got the shorts scared. They tried to press them down with even more rumors about higher shortfalls or more downgrades, but the bulls weren't buying -- or, more accurately,

selling

. That left the shorts to have to come in and buy without any supply.

The result: Dell is up nicely on a down day. Knight has rallied since the number cuts.

In other words:

Sqqquueeeeezzeeee

.

James J. Cramer is manager of a hedge fund and co-founder of TheStreet.com. At time of publication, his fund was long Avon. His fund often buys and sells securities that are the subject of his columns, both before and after the columns are published, and the positions that his fund takes may change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Cramer's writings provide insights into the dynamics of money management and are not a solicitation for transactions. While he cannot provide investment advice or recommendations, he invites you to comment on his column at

jjcletters@thestreet.com.