How To Short The Market? Caution Warranted

How To Short The Market? Caution Warranted

How To Short The Market

How To Short The Market

Updated Dec 2022

So the question is how to short the market? As they say be careful what you wish for?

The recent drop of V readings by 300 points to 10,000 may not have much impact on market volatility since we are still several hundred points above the extreme line. However, as long as the weekly trend remains up, this strong pullback may present a buying opportunity for top-notch stocks. It is important to remember that if a stock is great, it can always be repurchased at a much lower price.

While the trend is currently negative on the daily charts, the overall outlook remains bullish as the long-term trend is natural, with a bullish bias.  As the daily trend is negative, volatility levels may remain high unless the weekly trend matches the monthly trend. Shorting the markets now is dangerous as the overall long-term trend is still bullish, so it may be more prudent to use the pullback, albeit very strong ones, to add to long positions.

The most likely outlook is a strong rally, roughly until the end of the first quarter in 2023, followed by another corrective wave. The markets are unlikely to rally to new highs during the first quarter of 2023, especially as the Trend has turned natural.

If the lows of 2022 are tested, there is no need to panic if this comes to pass. The main concern is if the weekly trend turns negative.

 Using Pullbacks to Buy Top-Notch Stocks

The recent market downturn has not affected small-cap stocks as much as the large-cap sector. The Russell 2000, a small-cap stock index, has bottomed out and is showing a bullish pattern, with the daily trend close to turning positive.

In the past, October has been known as a bear-killing month, with pullbacks followed by a reversal and upward trend. Given the current weekly trend and the presence of corrupt officials in charge, the market is likely to continue trending higher for the time being. While the S&P 500 and Dow Jones Industrial Average suffered significant losses, small-cap stocks have held up better, indicating a potential opportunity for investors to capitalize on this trend.

Shorting is for Thrill Seekers

Shorting the market refers to the practice of betting against the market’s performance by selling borrowed shares with the expectation of repurchasing them at a lower price to make a profit. While it may seem tempting during a market downturn, shorting the market can be extremely dangerous. This is because the potential losses from shorting are theoretically infinite, while the potential profits are limited.

Furthermore, shorting the market goes against the general upward trend of the market in the long run. History has shown that the market tends to go up over time, making shorting a risky and often futile strategy.

While shorting the market may seem like a tempting strategy during a market downturn, it is a risky and potentially dangerous approach that goes against the general upward trend of the market in the long run.

Anxiety and Sentiment indexes

The sentiment readings and the Anxiety Index, currently in the Panic zone, indicate that shorting the markets could be dangerous unless one is nimble. Bullish sentiment has been trading below its historical average of 39 for nearly 15 months, suggesting that the market could rip upwards as soon as positive news hits.


Way Back Machine: Let’s look at past calls

The negative divergences continue to mount; therefore, we think the very conservative to conservative investor should sit on the sidelines until some steam is let out, even if it’s just a 4-5% pullback.  Investors willing to take a little extra risk can continue to open up long positions. We will not short the markets until the trend turns negative in the long-term time frames (weekly charts).  

The trend indicator overrules everything else; thus, regardless of the pattern, if the trend says something else, we will follow the trend.  In general, though, the patterns we spot tend to align with the trend (indicator).  Market Update Sept 30, 2014

Although there was a strong sell-off in the market, the weekly trend remains up, and the small-cap sector shows signs of strength. Fear levels indicated by the VIX, XBD, and AA sentiment ratios also suggest the market has room to run. However, the monthly trend is currently down; unless it reverses, there is a chance of putting in lower highs. It’s too early to predict a severe correction, and shorting the markets is not advisable as the long-term trend is still intact. Nonetheless, the path up may be volatile, and a change in either the monthly or weekly trends may lead to a correction picking up steam.

Is Shorting the Markets viable in 2019

The current market conditions show that the markets are in the overbought range, and as a result, there has been a sell-off, which is likely to continue. However, this is a good development for traders as volatility has increased, and it presents an opportunity to buy into solid companies during sharp pullbacks. The V-indicator, which measures market volatility and other factors, has reached a new all-time high, indicating that volatility will likely stay for some time.

Investors waiting for the ideal entry points may miss the opportunity to invest in top-quality stocks. There are signs that 2018 will be a good year for the markets, and traders who take advantage of the current market conditions will benefit from this trend.

Market Sentiment does not support Shorting the Markets

anxiety level and sentiment index

A Tactical Investor refuses to panic even when it looks like there is no reprieve in sight, for history indicates that panicking never pays off when it comes to the markets. Sol Palha

Based on the current market conditions, it is not advisable to short the market as the masses are not in a state of euphoria yet. Panic and fear-based decisions never pay off in the long run, as history has shown that the groups are often prime cannon fodder candidates.

As a Tactical Investor, it is essential to remain calm and avoid panic even during volatile market conditions. The best approach is to embrace sharp pullbacks and view them as opportunities to open positions in solid companies. One should wait until all the forces are aligned in their favour, especially mass sentiment, before considering shorting the market. Therefore, shorting the market right now would be disastrous for any sane investor.


Random notes on trading and Mass psychology

To become a successful investor, understanding Mass Psychology’s principles is essential. When the market experiences a strong pullback, we often panic and sell our investments. However, let’s take the time to study and understand the psychology behind these emotions. We can gain the power to say yes or no when confronted with similar situations.

To develop this understanding, reading history books and learning from other people’s reactions is helpful. Doing so can give us insight into how mass psychology can impact market trends and investor behaviour.

Once we have mastered the principles of mass psychology, we can begin to identify technical indicators that appeal to us. It is essential to choose indicators based on our preferences and not just because they are famous or promoted as the best options. Once we have identified our preferred indicators, we can study them and look for patterns to inform our investment decisions.

When conducting technical analysis, long-term charts, such as weekly or monthly charts, must be used. These charts provide a broader perspective and can help us identify trends that may not be apparent on shorter-term charts.

In summary, to become a successful investor, it is essential to understand mass psychology, identify technical indicators that appeal to us and use long-term charts to conduct technical analysis. By doing so, we can make informed investment decisions and avoid being swayed by emotional reactions to market volatility.


These articles discuss the potential risks and dangers of shorting the markets:

  1. “Why Shorting the Market Is Riskier Than Buying Stocks” by Motley Fool:
  2. “Why Shorting Stocks is Always Riskier Than Buying Them” by Investopedia:
  3. “The Risks of Short Selling” by Charles Schwab:
  4. “The Hidden Dangers of Shorting Stocks” by Forbes:
  5. “Why Short Selling Is Not for the Faint of Heart” by The Balance:

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