Jim, what I am trying to say is that there are no hard rules. I manage money more like a hedge fund manager than anyone else I know. This means that I often go both long and shorts and make use of divergence in derivatives and the underlying. In all this, all I've learned is to trust my instincts only. All the quantitative, technical, and fundamental analysis I do is to sharpen and educate my instinct and intuition. If this was not so, we could create a black box that would do our trading for us and we'd sit back and get rich. And that aint gonna hapen. The bottom line, I look at the situation, be it one stock or the whole market. I look at all the QA, TA, FA, ... factors I can sense. Then I listen to my gut as to what to expect. If I'm right, I double my position. If I'm wrong, I drop it like a hot potato. This is all that I've learned from the market.
Now let me try to give you the answers I think you are looking for. As a rough estimate, an increasing short position in a stock indicates that the stock price is going to go down and is a bearish indicator. The exception is when the stock does not go down (yes I know how I sound). There are typically 3 reasons for the stock (or the market) not to go down when there is an increasing short position:
(1) The shorts are wrong. The fundamentals are great. The shorts were foolish enough to short based on valuations (or misconceptions on accounting methods). MSFT, CSCO, and DELL come to mind here (and I'm talking about their earlier days).
(2) The market dynamics are against them. Ultimately the power is held by the longs. If longs are united and know what they are doing, the shorts will get their heads handed to them regardless of the fundamentals. KTEL, ZOLT, IOM, PRST were examples of this.
(3) You are at a market bottom. You will always have significant short positions at a market bottom. I don't think this is the case at the moment.
I disagree with your point about shorts not doing their homework and just looking for the cracks. As a short (and I've been one many times), you will be shreded to pieces if you don't know what you are doing. It is a lot more difficult to be a short than to be a long. Eventually all those shorts who do not do their homework will go bust (some with as little as two wrong trades). I know that there are a lot of foolish trend following shorts, but there are also a lot of foolish trend following longs. This is just the nature of the market in its late stages.
Now for your more specific points. AMZN and internet stocks in general, are mostly held by investors who understand market dynamics. I described this in detail in one of my early TDFX posts. Those longs coordinate a trap for the shorts and then call their shares in to trigger a squeeze. That you cannot barrow any AMZN to short is further proof that AMZN longs are holding on to their shares tight. Contrast that with TDFX share holders. They are the most ignorant (in terms of market dynamics) investors I've ever met. I am reffering to them as a collective and am not reffering to the SI group who are a well informed group or the few knowledgeable investors that I've met on yahoo and MF. Last quarter after TDFX beat the estimates fair and square by more than 14%, in the after hours there was absolute panic among the shorts (I know this for a fact). All they were praying for was to get out in the morning with their skin in tact. And what happend? Ignorant share holders dumped the shares of a company with PE of 12 no debt and growth rate of over 400% like it was going to go bankrupt tomorrow! For that, they got what they deserved; a 70% decline!
Once a decline like this happens, the psychology will take precedent over fundamentals. Don't blame the shorts for not looking at the fundamentals. They were simply following the lead from the longs. What is happening with the stocks you've mentioned, demostrates that if you don't know the rules, you will lose the game with a winning hand. Here is the post in which I described the psychological differences between YHOO and TDFX. It may be a good read. siliconinvestor.com
Good Luck
Sun Tzu
P.S From TDFX I learned that it is not enough to know which stocks to buy; I also need to know what kind of share holders are in control. |
