interesting article on shorts...including such stocks as SCMR (which is definitely getting picked on):
Personal Capital: Short tempers
By R. Scott Raynovich
Redherring.com, October 05, 2000
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The short-sellers have been having fun in the technology markets
these days, and you can't blame them. It's been a ripe
environment for shorting stocks. For those of you new to the
market, shorting means they're betting for stocks to go down by
borrowing the stock to sell now with the option to "cover," or buy
back the stock later, hopefully at a lower price.
Shorting has its place on Wall Street: it serves as a sort of
competitive reality check for the market in general -- that is, you
can't always bet that things will go up. For example, many funds
use shorting to "hedge" their positions by having a few short bets
on the side to protect them when the market turns south.
For some strange, irrational reason, short-selling provokes some
kind of visceral emotional reaction in many people on Wall Street.
Perhaps it's because shorting stocks is less common. After all,
the general trend of the stock market is to move up over time.
It's also an especially tricky art. Short trades by their nature are
riskier than long trades because the risk is seemingly infinite -- a
stock can continue to go up and up and up, while on the
downside, it can always stop at zero. Often, the window of
opportunity for shorting is smaller than that for going long.
SHORT PEOPLE HAVE REASON TO LIVE
So should we hate the shorts?
No way. Why be emotional? We should embrace the shorts.
Listen to the shorts. They are a good gauge of Wall Street's
mood.
When the market gets really ugly -- like it did this May -- you
have shorts popping up all over the place, crying for blood,
basking in the slaughter. This, combined with the aforementioned
visceral reaction of those traders betting against the shorts,
generates a kind of bubbling cauldron of fear and chaos in the
market.
But most professionals on Wall Street hold that shorting is
actually a contrarian indicator. That is, the more short-selling
that's going on, the more bullish a future indicator for the market.
Why? Because the shorts will eventually have to "cover" their
bets by buying back the stock they have already borrowed to
sell.
According to recent figures from Nasdaq, the number of shares
that were still being held short as of September 15 increased 4
percent from mid-August. But in the past few weeks, the feeling
of doom and gloom has not peaked. The shorts may still be in
their element. This is a trading market, a prolonged "sideways
summer" that stubbornly restricts the Nasdaq to a bearish trading
range.
TIME TO GO SHOPPING?
So, the market is in a period of choppy indecision, characterized
by a defeated, almost tired, attitude. It may therefore be a good
time to start dusting off the Personal Capital shopping list, the
one we started in May, and think about what to do when the
worries subside and the quarterly earnings start to paint a better
picture of the market mood.
The list of companies we have been regularly watching consists
of broadband-enabling technologies such as networking gear and
software, as well as content-management software and
applications. The stocks mentioned most often in the column
have included Akamai (Nasdaq: AKAM), BEA Systems (Nasdaq:
BEAS), Cacheflow (Nasdaq: CFLO), Ciena (Nasdaq: CIEN),
eSpeed (Nasdaq: ESPD), Interwoven (Nasdaq: IWOV), Juniper
Networks (Nasdaq: JNPR), Micromuse (Nasdaq: MUSE), Redback
Networks (Nasdaq: RBAK), and Sycamore Networks (Nasdaq:
SCMR).
As far as the "buy them when they're beaten down" approach,
little has changed, other than the fact that most of the stocks
are at a substantially higher price than they were last May, with
the exception of eSpeed and Akamai. I'll note, also, that
Micromuse is a particularly volatile stock, one that's risen
violently, and I'd be nervous about going anywhere near this
radical beast until some of this market turbulence settles out and
the company reports its quarterly results on October 23.
But since most of these stocks are higher, this might be a good
opportunity for profit taking. In terms of evaluating the growth of
these companies, we really won't have much opportunity to
evaluate their progress until the next reporting period. Therefore,
we will be carefully monitoring the market mood and readjusting
our list shortly.
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