Why Am I Not Shorting Stocks Right Now

It isn’t that I’m afraid to short stocks. Far from it. I’ve made a career off of shorting stocks.

In fact my short setups last year, on the whole performed better than my long setups. I’ve got no problem shorting stocks, but I do have a  problem when it comes to not having the ability to manage my risk. 

The intraday action is not the problem, in fact the intraday action is quite dull. The two sell-offs prior to today’s sell-off, saw closes above the price that they opened at, with the overall range being quite tight as well, relative to the overall day-to-day price change on the daily chart. 

It is the gaps that are the issue here. You have stocks that you can take on a 2-3% stop-loss, and it is quite easy to instead to wake up to a 5 or 6% decline in the stock instead, which completely blows up my risk parameters if that were to happen (and it hasn’t). 

You also have at risk the potential for a significant gap up, and if you are short after the market has already fallen 136 points from the highs that were established on 12/29 (6 trading sessions ago), you have the potential to wake up and see SPX trading 30-40 points higher because that is what happens in markets when you have huge market sell-offs. A dead cat bounce always ensues. 

Here’s my last reason. I do not know with any level of confidence where the market goes tomorrow. If I thought I had an edge, I would take it, but I do not, and I think traders in general are fooling themselves to think they have any special insight into what the market might do tomorrow or in the days ahead. 

One of the most important traits of a successful trader is to recognize when he (or she) does not have a clear handle on market direction and to not force a trade anyways. I’ve still traded since the new year, but I have traded in the time frame that I feel like I have the best edge in. But I have yet to hold a position overnight simply because I can not deduct the direction this market is wanting to take and with the massive increase in volatility, trying to trade overnight would be unmanageable from a risk standpoint.

And that will be the case until a greater level of clarity can be attained here with this market. 

I’d have no problem shorting the market right now, but when every move so far this year has happened while the equity markets have been closed, trying to make a profit here to the short side, isn’t necessarily impossible, because there are plenty of people who have done it, but the risk is nearly impossible to manage in an acceptable manner to me. And that is enough for me to focus on staying in cash for now and not holding any of my trades overnight. 

Oh, and if you think that just because the Chinese is shutting off the circuit breakers on their market tonight and going to let the markets ride, will create a total financial meltdown, well, you underestimate the Chinese, because there is no other market like theirs where the government is as active in manipulating their stocks at will, and when it suits their needs. Unlike other governments and central banks who instead choose to do it behind close doors (*ahem – Federal Reserve – ahem*).