I’ve recently posted one article advising the market bears to hedge their positions. Here is another advice about index shorting:
- Never short major indexes (like S&P500 or Nasdaq) until the economy is firmly in recession. The reason is, those indexes contain plenty of great companies that have some reasons to boom even if the stock market is in big trouble. Some companies discover new metal deposits, create new drugs, release new cool gizmos that nobody made before, win major lawsuits, get acquired for large premium – so many reasons to boom! Why would you short good companies together with bad ones?
- Never short single companies as well. If you are bearish on homebuilders (I am), how would you tell which homebuilder will do worse? What if you end up shorting the best homebuilder? It is so much better to short all homebuilders at once, this way nobody will escape
- If you go short, find something good to go long. It is so much better to participate when the market has good days! Read some books about sector rotation and keep your money in some of the late-cycle winners, something high-quality and conservative