The Trouble With Shorting
By James J. Cramer
10/1/99 1:56 PM ET
So why don't stocks go down when they are supposed to? Let's
go back to the Dell (DELL:Nasdaq) situation and augment it
with the Knight/Trimark (NITE:Nasdaq) trading. Dell got
downgraded; Knight had number cuts. On both, my instincts
were to buy, for one reason only -- the stocks are too heavily
shorted.
As is so often the case in this overhedged fund world we are in,
calls leak out, people press bets, and puts and shorts get done
with reckless abandon. I know a lot of people are short Knight
and Dell.
There are two problems with shorting: one is that somebody has
to sell on the bad news, and two is that you have to cover them
on bad news. (Unless you are a long-term short-seller, of which
there are very few.)
Both of these calls, the Dell downgrade and the Knight number
cut, did not produce the desired effect of panicked, Avon
(AVP:NYSE)-like selling. They just didn't reach that threshold.
That got the shorts scared. They tried to press them down with
even more rumors about higher shortfalls or more downgrades,
but the bulls weren't buying -- or, more accurately, selling. That
left the shorts to have to come in and buy without any supply.
The result: Dell is up nicely on a down day. Knight has rallied
since the number cuts.
In other words: Sqqquueeeeezzeeee. |
