Vol, that's always the big question for shorting stocks. What to do when the short starts to go bad.
If you've done enough fundamental analysis on the stock to know that the co.'s prospects are definitely poor, then I would suggest simply riding it out, as long as it takes, and as high as it goes.
If you don't have that much confidence in your analysis of the one company, then I suppose you just have to make a mechanical decision to cut your loss at some point.
If you are looking for a mechanical condition to avoid getting into this situation in the first place, nothing will be 100% effective, but you could consider trying market sentiment indicators. These are contrarian indicators: when the sentiment is too bearish, the market has a high probability of bouncing back, which is the worst condition to be short broken stocks. Overall, sentiment indicators are useless 90% of the time. They have predictive value only when they are at exreme readings. The way you use it is to set extreme thresholds of bullish and bearish sentiment, and when those thresholds are exceeded, then you use it to adjust your allocations: going more long when the sentiments are very bearish, and less long when they are very bullish.
If you want to try this with your backtesting, I can provide you with the weekly AAII sentiment survey data from mid 87 to early 99. You could simply take the data for early April, or whatever month you want, and see if it has any use for you. |
