I am not shorting these stocks here due to the valuations. I do not invest on emotions or opinions. I invest or trade based on what my systems tell me to do. These stocks although they technically look terrible, have ratios that are just out of line for what I would short. I do tend to make more money on the short side than the long side, but do it mostly in futures which is much more liquid. The reason for this is prices drop much more quickly than they rise in general. There is no reason to be afraid of the short side in highly liquid stocks.
I am saving my stock money for the fall long trade. I am putting a large chunk on that setup once it is in place. It will be spread across a group of undervalued blue chips at the time of the entry, probably 5 stocks, 20% in each. This trade should take place approx Nov 1 – Nov 15th depending on market conditions at that time. I do not mind being in cash making 5% for several months, knowing that I will likely make 20% or so in a few months, hence getting about a 25% return per year in stocks. Regardless of the stories you hear, very few people do that year in and year out.
The market over time has such a strong up bias, that most of my models to not meet my minimum return criteria to do alot of short stock trades. I require over 90% accuracy and very low drawdowns. Stocks with low price to sales ratios, and low debt will never give you that over time. The testing on shorting these types of stocks does not give good results.
I do not want to try and pick the one exception to an overall trend based on my opinion. I would much rather have a set of outcomes all pointing the same way, then pick the best one of the good ones. Shorting low price to sales stocks is like taking a set of 100 buy trades, where 90 win and 10 lose. Then you focus on the 10 that lose and try to trade it as a short. You may get lucky occasionally, but over time that is a losers game. I would rather focus on the 90 that win and try to pick say the best 40 of that 90 and buy them.
Here is another example. Lumber has a very stong tendency to rally in the fall. If you bought lumber on the 18th trading day of October and held it for 6 days and exited, you would have a winning trades the last 18 consecutive years. Would you rather buy it on that day, or try and find a reason why this year it will fail for the first time in 19 years? The wind is fully at your back in that lumber trade.
It is my opinion though that shorting the RE sector over the next few years on bounces is probably a profitable play. I will do it in the housing futures if the liquidity ever shows up.
I do not in general like the thought of shorting weakness in a momentum type of play like what we have now. The fally stock rally may put some gray hairs on the shorts because they could drag up everything. This rally could be a biggie.
The one guy claims he is making big bucks on that trade so good for him. I am not trying to rain on the parade, this is just my position as to why I am not short them. I also think the housing fallout will be less severe than what some people think. For those who think the big crunch is coming, I do not see any reason why at some point they should not have put positions.
