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How to Make Money Shorting Stocks in Up and Down Markets

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How to Make Money Shorting Stocks in Up and Down Markets
Now I am very much aware that many market players do not like to short stocks. This bias
against the short side of the market is totally understandable, especially given the fact that the
widespread reluctance is garnered and perpetuated by the various exchanges and the other
powers-that-be. For example, one can only short a stock if it is trading on an uptick. That one
rule makes getting shorts off (filled) extremely difficult in declining markets. The reason for this
handicap of course is to prevent traders from adding to the selling pressure. Yet there is no
bias of that nature directed against the upside. The exchanges seem to have very little
problem with the market rising in an unfettered fashion.
Now, the number of stocks that can be made available for shorting, even if they are trading on
an uptick, is being limited by the exchanges. This further handicaps the short seller, and
clearly makes it known that the powers-that-be don't want the public shorting. I don't know
about you, but whenever the higher-ups say "No, we don't want you doing that," I ask, "Hmm, I
wonder why they don't?" That's me. I'm a questioner. Always have been. Always will be. It's
the way I'm wired, I guess. Of course these rules are said to be for the benefit of the "average
investor," whatever that term means. But we as professionals know this to be untrue, at least
to a certain extent. These hindrances or barricades to the world of shorting are to protect one
of the last areas of really big money. Small fortunes (and some not that small) are made
everyday on the short side of the market by those professionals who do not have these
restrictions imposed on them.
A Specialist on the American Stock Exchange (AMEX) does not have to wait for an uptick to
get short. Neither does a NASDAQ market maker, for that matter. Again, my nature compels
me to ask, "Why? Why can they and not us?" It's the same age-old reason, my friends. Money.
Big money. And instead of the little guy being let in on it, he is being kept out, or at least
discouraged, all in the false light of "protection." The public is being duped again, and many
are buying it. "Why short when the market is going up" is the loud cry we hear from the
establishment. Yet it's the establishment who has conveniently made sure they are free of
these restrictions in this up market. I smell a rat! And the stench is incredible.

The Theory
Stocks that are up robustly on the day, ...
How to Make Money Shorting Stocks in Up and Down Markets
Now I am very much aware that many market players do not like to short stocks. This bias
against the short side of the market is totally understandable, especially given the fact that the
widespread reluctance is garnered and perpetuated by the various exchanges and the other
powers-that-be. For example, one can only short a stock if it is trading on an uptick. That one
rule makes getting shorts off (filled) extremely difficult in declining markets. The reason for this
handicap of course is to prevent traders from adding to the selling pressure. Yet there is no
bias of that nature directed against the upside. The exchanges seem to have very little
problem with the market rising in an unfettered fashion.
Now, the number of stocks that can be made available for shorting, even if they are trading on
an uptick, is being limited by the exchanges. This further handicaps the short seller, and
clearly makes it known that the powers-that-be don't want the public shorting. I don't know
about you, but whenever the higher-ups say "No, we don't want you doing that," I ask, "Hmm, I
wonder why they don't?" That's me. I'm a questioner. Always have been. Always will be. It's
the way I'm wired, I guess. Of course these rules are said to be for the benefit of the "average
investor," whatever that term means. But we as professionals know this to be untrue, at least
to a certain extent. These hindrances or barricades to the world of shorting are to protect one
of the last areas of really big money. Small fortunes (and some not that small) are made
everyday on the short side of the market by those professionals who do not have these
restrictions imposed on them.
A Specialist on the American Stock Exchange (AMEX) does not have to wait for an uptick to
get short. Neither does a NASDAQ market maker, for that matter. Again, my nature compels
me to ask, "Why? Why can they and not us?" It's the same age-old reason, my friends. Money.
Big money. And instead of the little guy being let in on it, he is being kept out, or at least
discouraged, all in the false light of "protection." The public is being duped again, and many
are buying it. "Why short when the market is going up" is the loud cry we hear from the
establishment. Yet it's the establishment who has conveniently made sure they are free of
these restrictions in this up market. I smell a rat! And the stench is incredible.
The Theory
Stocks that are up robustly on the day, and actually close near the day's high, are no doubt
very strong stocks. In fact, this strength, particularly if a lot of it occurred near the day's end,
will typically lead to immediate upside movement the following morning. The reason behind
this upside tendency is quite simple, though relatively unknown. Many people forget or do not
realize that the job of a NYSE specialist or NASDAQ market maker is to provide liquidity. This
means that if a stock is falling and there is an absence of buyers, they must buy. Conversely, if
a stock is running up quickly and there are no sellers to offset the buying, they must take the
other side as sellers. This often times puts the specialists and the market makers at odds with
the trend and or the current momentum. In many cases, the specialists and the market makers
will actually sell so much of their inventory (personally owned stock) on the way up, that they
become what the industry terms, "net short." This simply means that they have sold more
stock than they own and will have to buy the stock back lower than their average short price if
they are to make money. Therein lies the key to our philosophy. With specialist and market
makers (large firms backed by enormous amounts of money) short, they have a vested
interest in the stock dropping so that they can cover their open short positions at a profit. And
believe me my friends, they will do everything in their power to make it happen. Otherwise they
will lose, which they do at times, and lose big. This is where we come in.
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