Short Selling

There are so many different ways to make money in the stock market. The most basic way with stock shares is to buy them low enough and then sell them at a higher price later.

Did you know that it’s possible to make money in the reverse? You can sell shares in the market at a higher price first and then buy them back at a lower price later. This is called short selling.

The concept of short selling had me confused at first. I’d only heard that it was something a lot of traders did when they anticipated a drop in stock prices. None of it made sense until I executed my first short sale.


My First Short 

Many years ago, a certain company messed up royally and was getting a lot of bad press. Shareholders were selling in a panic and the share price was dropping in high volumes. I saw that the price was at around $76 and I believed it would go down more. I lined up my order to sell 600 shares at the current market price and I hit, “Short.”

After that, the price fell considerably. In the order box I clicked on, “Cover,” and I bought back 600 shares at the new market price of $74.75. That is a share price difference of $1.25. With 600 shares, I made $750, excluding commissions.

Broken down, it looks like this:

  • I short sell 600 shares for $76 per share (600 x $76 = $45,600). By doing that, I’m borrowing the shares from my brokerage to sell in the market for that price;
  • The share price falls;
  • Then I buy back (or cover) 600 shares at the current price of $74.75 (600 x 74.75 = $44,850)
  • At the end of my trade, those borrowed shares are returned to my broker. I get to keep the difference in the short sale for a profit of $750;
  • $45,600 – $44,850 = $750.

Despite the order at which the transactions occurred, the concept of buying low (at $74.75) and selling higher (at $76) is still preserved.


The Downside of Short Selling

As great as it sounds to make money when share prices are heading down, short selling is a riskier practice. Here are some reasons to consider:

1.Many investors don’t short sell or even know what that is. This means you don’t always have the majority of the market on your side.

2. Shorting is made possible when your brokerage firm has the shares to loan you from its own inventory of stocks. These stocks are either from the firm’s own positions or from the positions of the firm’s clients. If your broker doesn’t have the shares to loan you, you cannot short sell the stock. You end up missing out.

3. The market is generally optimistic. This means the fear and panic don’t always last as long as you might hope to support your short sell. Price reversals can happen fast. You generally need to have a shorter time horizon for shorts and you need to be watching your positions more closely.

4. When you buy a stock in the standard fashion, the worst thing that can happen is that your share price drops to zero before you’re able to sell it. In this scenario, the most you can lose is the entire amount of your investment. When you short a stock, the share price can go up indefinitely — this means you can lose more than the entire amount of your original position. Potential unlimited losses is what makes shorting considered a high-risk practice.

5. Profits from short selling are normally taxed as income rather than as capital gains. This is not favourable taxation.

6. If the company that you’re short selling is paying out a dividend, you have to pay the dividends owing to your firm or to the client those shares are being borrowed from.


Why I Don’t Short Sell

The reasons above are enough to discourage me from shorting, though there are many more that I haven’t mentioned. Short selling is a more advanced way to make money in the stock market and is best left to the pros. I don’t short stocks anymore because I prefer to own them.

I normally don’t discuss short selling because it’s not for most people, not to mention it’s really confusing. I only feel like it’s relevant to discuss shorting in a market like the current one so that new investors can understand the additional reasons why the prices of their stocks might be going down so much. It’s not just from investors collecting profits or abandoning their stocks out of fear of losing more — it’s also from short sellers trying to profit.

After the short sellers have had their fun and after all the panic selling and pessimism have subsided, it usually takes a while for a stock to recover before going up again with more investor confidence. I’ve got my wish list of stocks to consider buying when all the selling is over, so I’m just waiting for good setups and a better market.


Alternatives to Short Selling

Even when the whole market is negative, I don’t always want to sell my stocks, nor do I short any stocks, as you already know. Sometimes to combat the downward funk, I will buy shares of inverse ETFs to make money in the interim.

Inverse ETFs are exchange-traded funds made up of more complex financial instruments that generate money when the market is moving down. Like a regular ETF, its movements mimic the market index ETF it is modelled after, however, it’s designed to go in the opposite direction. Basically, when the market index goes down, the inverse ETF goes up. 

Index ETFs are often created in a way to move up to 3 times more than the index performance or up to 3 times less. These differences in performance can either enhance your trade or really hurt it when you’re wrong.  You have to be careful and consider this when selecting ETFs.

I still regard buying an inverse ETF a very risky strategy as it’s still in theory ‘shorting’ the market. Also, inverse ETFs tend to have higher management fees because they consist of higher maintenance assets than most regular ETFs. Higher fees and MERs in funds diminish their value and overall returns. For this reason, I usually only buy and sell them for shorter-term swing trades.


Before investing in an inverse ETF or deciding to short sell anything, please consider the risks. At this point in time (it’s December 2018), I think the market will go up a bit more before it goes down again early in the new year. We’re so close to the year’s lowest trading levels of the US markets. I don’t think things will really start moving up again until we at least break below those 2018 levels first.

I know a lot of investors who have been feeling beat up and want to do something to save their portfolios. If you’ve been feeling this way for the last few months, the best thing to do at this point is to think of your future strategies for your portfolio and be ready for them once the market is more positive.

Remember that downswings and bear markets are a normal part of the cycle for stocks – nothing goes only in one direction forever. Going short now after the market has gone down so much is not only is riskier, the returns won’t be as great had you gone short in early fall.

The Market Dumps

 

Dailies

The SPY, QQQ, DIA, and XIC ETFs on freestockcharts.com

While some investors have been freaking out, I’ve been casually checking the market and my portfolios. Is this the correction I’d been impatiently waiting for?

Looking at the daily charts of the SPY, the Qs, the Diamonds, and the XIC, you can see a few major things happening here. A big precipitous move often creates another one. Look at the XIC on Monday, Jan 29. It gapped down and just kept going. Something similar happened to the Dow on Tuesday. While there was some defending going on, it still broke its trend on Friday. The SPY and Qs had a huge down day like the others on Friday; however, their uptrends are still intact. It will be interesting to see if there’s a bit of a bounce before these go down even more and break their shorter-term trends.

 

Weeklies

When we pan out and inspect the weekly charts, it’s hard not to notice the glaring red candle on the XIC. Whoa, Canada! In one week, it wiped out all the gains made since mid-October. The other charts only came down past the gains from the last week or two. If this is the start of the move down for the US market, it might be wise to take some profits off your US stocks before they correct even further.

Monthlies

As for me, I’m just hanging onto everything and waiting for my next buying opportunity. In fact, I transferred more cash into my registered accounts so that I’ll be ready when I see a good trade is on.

I’m noticing some beautiful monthly corrections on the weed stocks. You can bet that I will be scaling into these before their next big move. If you have difficulty selecting which weed stocks to buy, then just buy the ETF, HMMJ. You can visit this link to get more information on the fund and its stock holdings. I created a watchlist on freestockcharts.com with all the stocks that are in the HMMJ ETF. I like to cruise through the charts and check out which ones are helping the portfolio or weighing it down.

The Transparent RRSP: Breakout, Breakdown

The week of December 18
  • I bought 35 shares of TPK.V at $6.55 on December 18. It cost $229.25 plus $0.35 in commissions. There is $11.86 in cash left in the RRSP account.
TPK

TPK.V price chart on freestockcharts.com

Last Monday, I put in a limit order to buy 35 shares of TPK.V at $6.55 and it was filled at that price. I was so glad as it went straight up right after…until it did a reversal on Wednesday. It’s now back to my entry price.

I did the above screenshot the day I bought the shares. I commented on the monthly chart that this stock could trade sideways even longer. Sometimes with these bottoming patterns, you’ll find that there are a few false takeoffs before it really takes off. My hope is that it continues to trade sideways for longer, offering even more entry opportunities to add to the position. That way, if and when it does take off, the upward move will have a better chance of being sustained even longer.

The market didn’t budge much this week and I don’t expect it will next week. Trade volume between Christmas and the new year is usually quite low. There might be a bit of selling, but I don’t plan on making any trade decisions within the next week.


Already people are posting with glee that they’re on vacation. I wish you all happy and safe holidays! I hope to catch up again next week when I’ll be in Vancouver. 

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The Transparent RRSP: Vacay

The week of November 27
  • I deposited $150 into the RRSP ahead of December. There is $351.89 cash in the RRSP account.

JP and I are going away for a week to Costa Rica (we’re going to the Pacific side). We decided to only bring our tablet and phones. Neither of us has plans to trade while we’re away. Our main focus is to relax, enjoy the warm weather, check out the real estate situation there, and read and swim at the beach. I might squeeze in some study time whenever I can. Derivatives and options have my brain turned in on itself – to take a week off could mean excruciating reviewing when I return.

The airfare was too hard to turn down: $770 CAD for both our tickets! Yes, we’re travelling at a time when the weather isn’t totally unbearable in Ontario yet. We do, however, plan to go to Florida in late February. That’s usually when the cabin fever is at its most intense and could use a warm disruption. Before I take off, I must, of course, look at the markets.


 

November markets

SPY, QQQ, DIA, XIU ETF charts on freestockcharts.com

 

I don’t know how the market will trade after the US Thanksgiving holiday. December could be positive because of a stronger retail sector around this time. The bearish correction in the fall that I was bracing/hoping for never came. (And that is why we trade the trend, even if we don’t believe it’s still there.)

The trade volume in the US markets seems to be coming down while the prices are going up. The confluence of those two factors often means that: 1) savvy investors start to take profits, and 2) the public starts asking those investors if it’s a good time to buy Apple. The best thing to do is wait for 3) to happen, which is an actual correction.

I was in the Caribbean on my first and last cruise in early 2015 when this happened:

Caribbean

XIC ETF on freestockcharts.com

When JP and I checked our email for the most expensive 10 minutes of our lives, we also checked the markets. At the time, we were only day trading, which meant we were holding no positions in our accounts. Although we weren’t losing money, we figured good opportunities would be short-lived. We were concerned about entering a more hostile trading environment in which small fish like us would get eaten by the bigger, well-funded fish.

After we returned and got our sea legs back, we looked at Canadian companies that traded on both Canadian and US stock exchanges. We discovered they were CHEAP. We bought just a few to hold long term and had a gangbuster year. I doubt the market will do that in the week that we’re gone. Perhaps next January?


I have some stock charts worth checking out:

  • FIRE.V (New and risky, but cheap. Take fewer shares.)
  • IMH.V (Same as above.)
  • TCW.TO
  • SSL.TO (I already have this in my RRSP.)
  • SMF.TO

Please check the company, the sector, the earnings, the market, and the fundamentals that you think are important. Always do your due diligence to trade with confidence while respecting your risk tolerance. I do think that the market could pull back early in the new year. You could wait until then before buying or take fewer shares now and more later.

The Transparent RRSP: Taking Some Action

The week of November 6
  • I didn’t do anything for the RRSP. There is currently $194.64 of cash in the account.

I did, however, pass my Technical Analysis exam. I certainly didn’t do as well as I wanted to though! I carried on by buying some shares of H.TO and ATZ.TO for my TFSA. I already own these stocks in the TFSA so I was just scaling into what looked like some (aggressive) buying opportunities. I also signed up for the Derivatives Fundamentals & Options Licensing Course and the Futures Licensing Course. (Talk about intense content!) I hope to finish these courses early in the new year.


I’m still not a fan of this market and entering any new positions makes me nervous. I am considering making a move this week, though, depending on how my idea performs alongside the market.

TA2

TA.TO price chart on freestockcharts.com

The daily and weekly charts aren’t great for TA.TO; however, the monthly is appealing to me. It’s making higher lows and demonstrating a trading range that is tightening. This could lead to a really good long-term trading opportunity with so much room to move into the upside. I wouldn’t mind owning more shares of this stock should this move actually occur.

Last Thursday and Friday experienced heavier selling in the U.S. and Canadian markets. If the selling continues and the market starts to correct this week, I’ll be watching this stock to see how it performs against the market. TA is in the energy sector which has been showing more strength than other sectors. If energy keeps going, scaling into this could be a good idea.

I would only scale in with a few shares (5 to 15) as I think the market will still endure a larger correction. I don’t know if energy’s strength will outlast or outperform the overall market correction. There are times when the right thing to do is sit on your hands and wait, while other times you should take full advantage of great opportunities. I feel that right now, I should find some balance in taking some action with little risk as opposed to doing nothing.

 

The Transparent RRSP: A Beauty Swing Trade

The week of October 30 
  • I deposited $150.00 into the RRSP account. There is 192.17 in cash now.

I’m still waiting for the market to correct, even by just a little on the weekly chart before I do anything. My focus is also elsewhere as I have an exam tomorrow for my Technical Analysis Course. Even though technical analysis is my ‘thing,’ it would be totally humiliating if I didn’t pass. I’m actually studying much more for this exam than I did for my last one. This also means I’m putting in zero effort in looking presentable around the house. JP drew this picture of me this morning:

 

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This is me.

 

If this is how I look right now, JP must really love me for what’s inside!

I haven’t been interested in opening any new positions in the last little while because I’d rather wait until the market has had a correction. For JP, his strategy in trading an extended market is to trade this bullish sentiment with shorter term trades. He took a beauty trade last week worth talking about.

MOGO

MOGO on freestockcharts.com

JP bought shares of MOGO.TO last Thursday. Then on Monday, KABOOM! He sold 2/3rds of his shares. On Tuesday, he sold some more shares. Now he has a small number of shares which he’ll keep in for a longer time period.

The thing is, MOGO has been on JP’s radar for quite some time now. It’s had a number of breakouts (November 2016, January 2017, February, and April). He either missed the breakouts or wasn’t paying close enough attention to during those times.

MOGO had been building a base over the last two months. It had consolidated, trading sideways with the price range tightening up on less volume. In a bullish market, this is a money setup. JP’s patience paid off with a handsome profit made over just a few days. He also bought shares of PUR.TO and DRM.TO. I hope these trades work out too!

 

 

 

 

 

 

Sector Action

The Canadian and U.S. markets closed strong this week. There was a bit of weakening on Wednesday, but some big moves for Microsoft and Amazon last night helped the NASDAQ as well as other tech stocks. The energy sector just had a strong couple of days which helped the rest of the market.

oils

Oil/energy ETFs HOU.TO and XEG.TO on freestockcharts.com

A lot of Canadian oil stocks were in play today. Here are a few:

  • RRX.TO
  • CPG.TO
  • CVE.TO
  • CFW.TO
  • TCW.TO
  • TOG.TO
  • ERF.TO

The charts for these either had good daily, weekly, or monthly charts – but none of them had great setups on all three of these timeframes. I decided to take a look at a couple of the energy ETFs, the HOU.TO and XEG.TO.

While it looks like the recent surge could take the sector higher, I checked to see if there is room to move up. The bullish move had already started in September, now nearing previous resistance as marked off on the charts. If the sector moves sideways a little longer with more buying and less selling, it could result in a more substantial move up.

This weekend, as you attend your costume parties and chat about the markets with your friends, try not to get too swept up in all the hype. It’s tempting to get really excited over all the market action that’s happened in the last while. Before you start buying up tech and energy stocks, watch how the market digests this over the next week or two.


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