When To Short Stonks | Podcast Episode #152

0:04
Hey everybody, this is Ryan Mallory with Swing Trading the Stock Market. And I got a good episode to cover here today, and it’s not the most sexy of topics that I’ve talked about in the past. We all like to talk about stonks only go up.

0:21
Well, we’re gonna talk about one short stonks or stalks, right? Stonks, I kind of like saying stonks. It’s just kind of funny to say it, but anyways, the more serious label for this episode would be When the short stocks. So, the name I’m gonna use, straight out of the movie Sweet Home Alabama, good redneck name, Earl Smootter.

0:45
And Earl writes, Ryan, first of all, thank you for all you do to help the understanding. Ryan, first, Brian, first of all, thank you for all you do to help people understand and navigate a market that appears to be against the little fellows like me trading with less than $25,000.

1:05
I love listening to your podcast and being a member of the trading block. Unfortunately, the burning question I have right now is not the most sexy in this current bullish market, but nonetheless, I’d like to hear your ideas on getting short when the market hits the top. Never hurts to be prepared for when the time comes.

1:21
So here’s my questions. What’s the best way to short the market? Inverse ETFs, short selling, puts? Is there any particular type of account I need to use? Any of those options, any information you could provide would be much appreciated. Thanks, Earl Smuter.

1:56
Now before I get into his questions, what am I drinking? Well, I picked up a fine looking bottle of Old Forester straight bourbon whiskey. I like the 1910. I like the 1920. I’ve heard some pretty good things about the statesman. So I had to try it out.

2:17
The bourbon itself, I believe, was named after. The bourbon The statesman name for the bourbon came from the movie The Kingsman. Came from one of the Kingsman movies.

2:37
And it’s 47.5% alcohol, 95% proof. When I, when I try it, it’s not as good as I thought it was going to be, and that might surprise some of you guys. I mean, it’s still good bourbon, but compared to the 10 and the 20, I don’t feel like there’s a comparison.

2:55
Now, some people are gonna have a lot of different opinions on that one than I do. But it’s got a sharp taste at the beginning. And I usually like to have the sharp taste at the end, just a little bit of a final hurrah. Just a final Hooray before it goes out.

3:15
Just a nice little Um before it goes out. But this one starts with a sharp taste, and it’s much sharper than anything I got from the 1910 or the 1920. And it smooths out at the end.

3:33
It’s like it’s like as it goes across the palate, you get this like nice oak flavor in the beginning. And then it kind of goes into this like campfire type feeling where it’s like, almost like a roasted marshmallow that you’re eating there at the end, not necessarily in terms of sweetness, just that like charcoal flavor.

3:53
It’s very unique, and I’m not gonna take anything away from it. It’s a unique bourbon. And on a scale of 0 to 10, like I always judge these, I give it a 7.1. Overall, it’s a solid bourbon. You’re not gonna go wrong if you buy some. I think it’s like a $50 price point.

4:11
But overall, it’s very solid. So, back to Earl Smootter’s email here. First of all, he talks about how, you know, he’s one of the little guys trading with less than 25,000 and there’s a ton of you guys out there now that are doing that and congrats to you.

4:30
I think it’s awesome that so many people, and I’ve said this in previous episodes, are wanting to get involved in the stock market. Because done right, it can really open a lot of doors for you in your future, and it’s OK if you start off small.

4:48
You got to start somewhere, and you can add money to your account over time. That’s what I did when I was starting, you know, if I had some money saved over. After I paid all my bills, I would add it to my trading account. And I just got better as time went along. I learned a lot of lessons. I’ve had to gain a lot of uh experience, suffered some heartache along the way.

5:11
But I learned and I, and I made money in the process. Sometimes it was only a few bucks. But that’s OK. The thing is, is, and you’ll, you’ll notice this because this is what I emphasize on this podcast. Don’t get caught up in the dollars. Just focus on making good trades. If you’re trading with $100 focus on.

5:29
Managing the risk on the $100 as if it was $10 million. Focus on the risk, focus on your emotions, focus on how you’re managing the trade. And if you can do it right with just a little bit, eventually, as you grow that account, you’ll be able to do it with a lot too, but it’s good to when The implications for a bad trade when you’re trading under $100 won’t necessarily kill you in life.

5:57
It’s good to be making some of these rookie mistakes early on. And you wanna know what’s even crazier to me? I, you see all these congressional hearings, worried about the little guy, about the restrictions, about stopping the buying. On Stocks like GameStop.

6:21
And what, what happens? And then These hypocrites are out there putting a restriction on anybody that has less than $25,000 in their trading account. And if you trade more than 3 times.

6:39
Within a five-day period, guess what? You’re considered a day. You’re considered a pattern day trader. And what does that mean? It means that. Anyone who opens and closes more than 3 stocks. Within a 5 day period.

6:57
Well, then they start limiting your account automatically. Every brokerage does it because they’re required by the federal government to do so. And so all these congressmen and congresswomen, they wanna act like they’re so outraged. By Robin Hood.

7:13
And yes, what, what all those people did was wrong. But don’t act like But they can’t be up there acting like that they’re holier than thou art when they’re literally sticking their thumb down on people trading with less than $25,000 by saying, hey, you do it more than 3 times.

7:31
You know what we’re gonna do? We’re gonna keep you from being able to close out your positions. Until you put more than $25,000 and we’re only doing it because we care about you. Right. I don’t think the government has ever cared about the people before. They like taking your money. They like taxing you, they like regulating you, but they don’t care about you.

7:53
I’m sure after all this stuff with the GameStop fiasco, and now it’s trying to go back up again. I’m sure that there’s going to be. Some regulations that come out of it because we’re looking out for the little guy, but it’s always gonna come back to the retail investor screwing them over.

8:19
So, as it pertains to shorting stocks, you gotta remember this, shorting stocks carries infinite risk. Now, no one’s ever lost infinity on a stock, because you can’t really define infinity. But people have taken some pretty bad losses.

8:35
On shorting stocks. I mean, look at, look at Citron and. I mean, look at Citron and Melvin and all those guys, they got destroyed. By the GameStop short, and some of these people probably lost more than 100% on the trade. So yeah, you can lose more than 100%. You may get margin call depending on the status of your account before then, but You better recognize that you get some kind of bad news piece against your short position.

8:54
But if you get some like really good piece of news that goes against your short position and causes the stock to rally incredibly, and we’ve seen plenty of stocks that go up 500% overnight. Well, guess what? You just lost more than you even shorted.

9:19
Now, the account that people get for for shorting stocks is a margin account. Can’t really do it in your IRAs, but there’s some workarounds. That includes like inverse ETFs. You can get like a 1 X 2X or a 3X ETF.

9:36
The higher you go on those ETFs, the more volatile they become, and there’s a time decay factor in them as well, because they reset every night. And I won’t get too much into the Particulars of how, how it resets and how there’s this time decay element to it.

9:53
But there is, and what you wanna make sure. Other is that you realize So what you wanna make sure is like, I mean, look at look at like. FAS and FAZ it’s the ultras for the financial sector.

10:20
What you’ll notice is that this FAS, it’s a 3x return of the financials. And while it’s been doing really good of late, it’s nowhere near its all-time highs from early 2020. But if you look at But if you look at XLF, guess what?

10:37
It is way beyond the highs from 2020. And why is that there’s a time decay element. So the longer you stay in it, the more difficult it’s going to be. Same thing with FAZ.

11:00
FAZ has had to be reverse split so many times, almost like every 2 or 3 years, it undergoes a reverse split. Go back to ’09, this thing was trading at $800,000 a share when you account for all of the reverse splits. Today it’s trading at 472.

11:17
That’s because there’s a massive time decay. So you can’t make long-term positions out of these ultra ETFs. That’s very bad news. Honestly, I don’t think it’s a good idea to short. I don’t think it’s honestly a good idea to use these ultra ETFs unless you’re really good at what you’re doing.

11:35
I mean, I’ve used them. I try to stay away from the 3X1s as much as possible. Usually the most I’ll do it, this doesn’t. Most of the time I’m probably trading the 2 X ETFs or the 1 X ETFs. And so, essentially, like you take.

11:59
SPXU Which is a short on the S&P 500. If the S&P 500 goes up 3%. The S&P 500 goes up 3%, you’re. If the S&P 500 goes up 1%, you’re losing 3% on your SPXU trade.

12:18
The vice versa. If the S&P 500 goes down 1%, you’re making 3%. Now, we sometimes see some of the biggest gains at the market bottoms, right? You get this huge reactionary knee jerk move to the upside, and what happens is is that You might see like a 4 or 5% move out of the stock market.

12:45
Well, if you get caught on the wrong side of it, and you’re on the wrong side of a 5% move on. The S&P 500, SPXU is going to be down 15% that day. And if it’s gapping higher, that makes it even worse. So you gotta be cognizant of that.

13:01
You got to be cognizant of the risk that goes along with trading these 3X and 2X ETFs.

13:16
Now when it comes to shorting the market, I think a lot of times people are too eager to jump into the short side. They get a couple of days to the downside of, hey, I don’t quite know what’s going on with this market, but it must be bearish because it’s not making me money right now to the upside, so they get short. That’s not a good thing either, guys.

13:33
You don’t want to be doing it because you just don’t know which direction to go and you want to take a, a bold move so that you could say, hey, I told you I caught it right. I nailed the top. When it comes to shorting, you don’t want to be trying to nail the top of a stock market, OK? There are so many people who have blown their capital on trying to time the stock.

13:51
On trying to time the top of the stock market. It’s, it’s really an impossible task. You just can’t do it on a consistent basis.

14:40
Instead, what you want to do is, and this is, this is my take on it as well. I let the market have its initial sell-off. I don’t feel the need to catch the very top. I’m gonna let it break down, show that it is really serious about breaking down. And then you’re going to inevitably have this like dead cat bounce. It might only last a couple of days, it might last a couple of weeks.

14:58
But when it gets his dead cat bounce, it’s going to move a little bit higher. It’ll squeeze a little It’ll squeeze some people out of their short positions, and some people will think, OK, the selling’s done and over with, but you’ll start to see that there isn’t a lot of strength to the rally. The volume’s fading, you’re just not getting a whole bunch of people that are piling into the stock market.

15:18
It might make a big move, but it’s doing so on low volume, not because there’s a ton of buyers. But because there’s a lack of sellers out there. But once that dead cat bounce following that big initial move to the downside fades.

15:38
Then you want to start short in the market. Now I’m having to be careful that I don’t get too intricate here on the technical side of things because I don’t have the ability to show you the charts. So I’m doing my very best here to like explain it to you without needing to visualize it. So you get that initial bounce higher and then that’s where you really want to start shorting the market.

15:58
You go back to 2020 when we had the big sell-off from the COVID pandemic. Yes, there were some opportunities to make money to the downside, but you really had to chase after it. I had a few short positions that were on initially and I did make some money. I didn’t hold it nearly as long as I should have because frankly, who expected the market to sink as much as it did in a one-month period?

16:20
Because This is the other thing too. And I wasn’t planning on tackling it at this moment, but it kind of provides a good segue for it. And that is, The S&P 500 or any stock for that matter, but that you’re shorting, there’s a floor to how low it can go. It can only go down to 0.

16:36
So you’re not gonna make like a 400% return shorting a stock. Now you could possibly Now, if the S&P 500 was to drop like 40%, you’d make a lot more. You’d make about 3 times that.

16:53
If you’re using an ultra. But I’m just talking about shorting in general in theory, not talking about the ultras.

17:19
They can only go to 0, but you also carry that potential for infinite loss. So you definitely gotta use stop losses on these things. And you don’t want to really turn your shorts in the long term positions. I mean, these aren’t things that Typically you’re gonna hold for years and years and years cause you’re also paying interest on borrowing those shares as well.

17:37
And it’s But you’re also gonna be paying interest on those shares that you’re borrowing as well.

17:58
But really, in my opinion, the best. And most recent opportunity to short the market was back in 2018, late 2018. You had an initial sell-off in October. You had a dead cat balance that offered you an opportunity to get short, wrote it down lower, then you had a little bit of a sideways drift higher in November, and then the market sold off again in December, really, really hard and it bottomed out, I think on Christmas Eve of December 2018.

18:22
That was really the best opportunity. There were two key moments to get short. There really wasn’t much of that in 2020 during the COVID pandemic. It was like straight down, straight back up to all-time highs. That’s literally how it worked. And there hasn’t been an opportunity since then to really get short. This past week, the market on the 60 minute chart was looking a little bit toppy, and a lot of people got a little bit concerned because we did see a little bit of selling that we hadn’t been used to in recent weeks or months.

18:47
And so people got short, but the problem is, is that it bounced right back up. And so those initial bounce backs, they can, within a moment or two. Just wipe out all the gains that you have to the short side. That’s why I like to see first, can this market really sustain a sell-off?

19:03
Because when you have an accommodating Fed and you got 0% interest rates, the money’s very easy. So as a result, there’s this propensity for the market to keep going higher. So I need to see it for myself. This market is really willing. To usher in some panic into the market to really push.

19:21
Asset price is lower. And if it can do that, then on the Decat bounce, I’m gonna start shorting the market. The cool thing is, is I’m always providing. What I’m shorting via swingtradingthestockmarket.com.

19:39
I post my watchlists out there multiple times. Each week I also provide you with daily setups with both bullish and bearish. Each and every day, and I’m gonna give you the most intriguing charts that I come across on a day to day basis.

19:57
With that, you’ll also get updates on the Fang stocks, plus Microsoft plus Tesla and updates on the market as a whole, so you always have a good idea from multiple time frames. Where we stand with the stock market. Is the stock market selling off? Is it about to really tread lower?

20:14
Is it really start Is it ready to start trending lower? You’re gonna get all of that with my market analysis as well. So go to swingtradingthestockmarket.com and check that out for yourself.

20:42
But in the end, it’s really better to be slow to short. Don’t try to catch those market tops. People write books about catching market tops. They’re usually wrong. People are always pontificating on social media, Hey, this is the market top, be ready. Market goes down 300 points from here.

20:58
There’s no way that they know that, guys. Don’t get caught up on all these predictions. I would probably stay away from a lot of these people on social media that you don’t really have much of a. Level of confidence with. One thing you’re not gonna see me doing on social media is predicting market tops and market bombs when they happen, I’ll react to them then.

21:19
And in the case of short selling, I’m always gonna be I’m always gonna be slow to short. I think that’s so important. You gotta be patient. Patience will make you money in the stock market. And if nothing else, if you’re not sure if the market’s rolling over. Or you just need some perspective on where price is.

21:37
Look at the moving averages because that will smooth out a lot of the noise. I mean, if the, if the index is still trading above their 5 day moving average, probably not that bearish of a market. It’s trading above their 10 day, probably not that bearish of a market. It’s not really breaking down yet. You start getting down to the 50, you may have an opportunity for a bounce there.

21:56
So you got to really be patient. With the market. You got to let the opportunities come to you. You don’t want to force it and you don’t want to chase it to the downside because especially more so with the downside, chasing is huge error in one’s trading method.

22:15
Chasing a stock to the downside is a huge error because you oftentimes will get caught in that short squeeze and dead cat bounce, and if you start shorting out 100, you’re gonna find yourself trying to cover out 110 in no time. So you really want to be shorting dead cat bounces, the short squeezes after the initial sell-off.

22:38
That’s gonna do it for today. If you guys have any questions, feel free to email me, ryan@shareplanner.com. I love getting you all’s questions. I also encourage you to Go and leave a review on whatever platform that you’re listening to me on.

22:55
If it’s Apple, please go there and uh try to leave a good review if you feel like I’ve deserved it. I’m hoping that if you’ve listened to it for this long, that, that you might hold a, a good feel. That you’ll have some good feelings towards me that might warrant one of those five-star reviews. They, they are like currency in the podcasting world, so I do appreciate that.

23:15
And it And again, if you have any questions, feel free to email me, ryan@shareplanner.com. Thank you guys. God bless.