Retail traders love to sell short. I’m not sure what the appeal is but I’m going to urge you not to do it. I’ve been doing this for a long time and I can tell you that there are only 3 people who ever make any long term gains selling short. One is the professional short sellers. They have big research departments and they make money by finding sick companies that are on their way to bankruptcy.

The second group of traders that make money selling short are the big banks and huge hedge funds that can manipulate price. They know when price is going to start down, and they know when to take profits because they are the ones that initiate the sell off, and they know where they are going to cover.

The third type of trader that makes money on the short side are just lucky. How consistent do you think those guys are?

Folks here are the simple facts. Markets go down differently than they go up, and the mathematics on the short side are against you. You simply can’t make that much money selling short because the maximum winning trade is only 100%.

This holds for bear markets as well as bull markets. As a matter of fact I would suggest it may even be harder to make money selling short in a bear market than it is in a bull market because the counter trend moves are more violent, and more likely to knock you out of your short for a loss.

Like I said, markets go down differently than they go up. A strong trending move up is not that unusual so trend followers on the long side often make money. However, a strong trending move down like we had in oil last year is an anomaly that is pretty rare. Let me show you what most bear markets look like.

selling short

After the initial crash that took gold down to $1180 it then took 2 1/2 years for gold to lose another $140. I watched as bears lost money on trade after trade after trade trying to short this market. The simple fact is the only way to make money in the typical run of the mill bear market is you have to correctly anticipate where each bear market rally will top, and where each leg down will end. I can tell you that in all of my years trading markets I have never yet seen anyone call bear market tops with any consistency.

Now notice that four of the legs down didn’t make lower lows. Bears holding shorts during those intermediate corrections got caught in short squeezes and lost money because the markets didn’t do what they were anticipating. They didn’t actually deliver a leg down.

I would challenge any of you to actually look at your trading history over your career (if you have it), make an honest assessment, and most of you will find that over the long haul you haven’t made any long term gains trying to sell short. And for 90% of you it’s probably actually cost you money in the long run to sell short.

The simple fact is that for most retail traders selling short isn’t about making money, it’s about bragging rights. They have an irrational desire to try to call tops. In trying to fulfill that desire they ignore the fact that they are losing money. I’ve watched over the last two months as trader after trader has tried to call the top in gold and short the market. Whether it was a reversal candlestick, or an oscillator that was overbought, or they counted a certain number of waves, or the market just looked toppy to them (I never understood what that meant by the way), every one of them failed, and the end result was they gave back some, if not all the gains they had made on the run up.

I can’t stress this strongly enough, and again I’m trying to prevent you from making the same stupid mistakes I made as a novice trader, if you think a market or sector is topping it doesn’t mean you need to sell short. You may be wrong and the market just continues rising, and you end up giving back the gains you made on the long side. If you think a market has rallied far enough, and you don’t trust it to be long anymore then go to cash, or move your money to some other sector that is going up instead of making the amateur mistake of trying to sell short.

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  1. Gary Post author

    Once any of the major indexes break their 7 year cycle down trend I will make the call that the multi-year cycle low is complete and a new 7 year cycle has begun. There is virtually no chance of that topping in less than 3 years.

    The two closest at the moment are the Russell and the mid caps.

  2. Moses Gonzalez

    Yes, I agree…. Very true sound advice, filled with wisdom, humility and just plain “telling it like it is”. It’s why I read everything Gary writes and ignore most of the other noise, distractions and discussions on SMT.

    Thanks for keeping it real, and staying focused!!!

  3. Russell

    It’s possible to make more than 100% buying puts, and if one buys puts a bit outside the money, they have a huge upside if the market moves your way, but limited downside because you can only lose 100% of a relatively small investment. Cheap options have what is effectively their own stop limits, because the initial investment is so small compared to buying the security directly.

    But considering you manage the quest portfolio, you already know all this, ha.

    1. Van

      Yes but most puts expire worthless because they never reach the strike price.
      Those who sell puts seem to do far better than those who buy them.. on the whole.

  4. Russell

    And doesn’t biotech/IBB look like it’s just begging to be taking down another notch or two?

    I agree with your long term thesis that we may be near a major uptrend phase, but with a short term reversal due soon, the way IBB loves being beaten down more than the broader market makes my ass twitch.

    1. Duuuuuude

      Your point and figure chart shows a bullish price objective at 307. That looks to me like a stock that is ready to take off!

  5. james moffett

    Gary — I’m worried that the miners may now be in for a significant correction. Are you protecting against that with stops, trade triggers, or going to cash?

    1. Gary Post author

      I posted that I had taken profits on the last 25% on Friday. The matals portfolio is now in cash till May.

  6. Barney

    Actually very Sound advice from Gary.

    However I’m still loaded 95% 3x short gold and dust at this point.

    Starting to short 3x s&p, dow and nasdaq, loaded 50%.

    Guess you can’t teach an old bear new tricks.

    1. Gary Post author

      Day trading short is one thing. Position trading short is another, and very unlikely to pay off this early in an intermediate cycle, and with the commercials heavily long.

  7. pacoquin in spain

    ok, thank you very much Gary, and what would happen if Gold now falls down to 1140 (61,8% fibo) and 1100 (76,4%) ??? where we stand ?? so far 1280 > 1230…..

    1. Gary Post author

      I don’t know if gold has begun an intermediate degree correction or not, but once it does I expect at least a 50% retracement.

  8. Bernard

    Your example is totally wrong. You had to start the short trend at 1600 USD for an ounce where the bear market technically started. On the long run inflation and QEs drive prices higher, that is the reality but who buys and waits for years ?
    Going long or going short all the time doesn’t make money, that’s not how markets work. You can go long or short when it is going to make money.

    But if there are 2 euqities moving opposite of eachother, longing the cheap one is always better than shorting the expensive one to make more money, especially if you use leverage.

  9. Kosta C

    Gary (and anyone else),

    With the recent news regarding the heavy corporate buy backs most likely driving the recent equity rally, what are your thoughts on “dumb money” being corporate executives and not retail traders? It recently occurred to me that this is the most emotional of all “trader” segments.

    Due to the lack of direct impact any drop in share price will have on the decision makers for this. It is really only a win-win situation, considering that as share price drops they see it affecting paychecks, which in turn drives them to “emotionally” increase their corporate buy backs to save their income.


  10. Jacob 2

    Been at this a while. Agree, short selling more trouble then it’s worth. Better off Buying the decimated: LABU or emerging market ETF’s And waiting. Which is what I have done.

    1. Vortex

      Jacob, isn’t LABU going to split 4-1 soon? May be better to wait and take a position on the expected pull back.

    2. Bud Fox

      Buying a 3X and “Waiting” is a big mistake.

      Decay and being wrong will turn a small loss into a ugly loss that will never get to even.

      1. Jacob 2

        Aware,of,the decay in LABU and also the reverse split….From 60 to 6 in less then a year. At this level ill buy and take my chances.

  11. Jay

    As a big short seller once said to me: “You better believe in the PPT! If you don’t now, you will!” 🙂

  12. Dan

    What a bunch of garbage.

    You could have made a fortune shorting commodities, small caps, miners and biotech over the last 18 months. And now you’re just going to buy the next gold and biotech ‘pullback’ as they spiral down to new deflationary crash lows.


    1. Bud Fox

      One cannot be successful shorting using a daily chart or sitting in front of a PC all day.

    1. Gary Post author

      If I’m not mistaken you were saying the same thing the whole way up in gold. And that is how you lose money trying to sell short.

      Markets go down differently than they go up. Just looking at a long term chart and saying “see how easy it was to make money selling short” doesn’t include the real time effort of actually trying to short. In real time the violent counter trend reactions would have knocked you out of your shorts for losses. I know I’ve watched over the last two years as bears have tried and tried to short gold and lost money over and over even though gold was going down.

      I’ve watched as one trader after another has tried to pick a top in gold and the stock market recently and lost money.

      You can save yourself money over the long haul by taking my advice or you can trust that you will be one of the lucky few that actually succeed at selling short. Good luck.

    2. Duuuuuude

      They are certainly both rounded, and both manipulated. They both also have a tremendous amount of smart flowing into them according to COT reports.

      I had a doctor today telling me about that “dome of doom” chart on the SPX while very few noticed the bottom happening on the gold market. It is too obvious. If you look at how much dumb money is flowing into puts, that proves my point as to how bearish the average trader is. The average trader does not dictate market direction for either stocks or commodities however. Smart money is selling these traders their puts.

      Gold coming out of a very stretched 3 year cycle while the stock market is in the normal timing band for a 7 year cycle. The commodity markets are at extreme levels not seen since the early 1970’s.

  13. Alexandru Popovici

    as I’ve pointed out before, this is how:
    1) USX and stocks are in a negative correlation since the ICL in February and stocks are in a DC decline while the dollar rises (and not positively correlated anymore) and how
    2) crude oil and CRB have also commenced their DC decline,
    3) all these while treasuries have charted their ICL.

    just as predicted some 4 weeks ago.

    1. Gary Post author

      Nope still too early for the daily cycle to top. We could try again to produce a half cycle low, but the final daily cycle top won’t occur until the last week of March.

      The commercials are way too bullish and dumb money is way too bearish for the market to be even vaguely close to this intermediate cycle topping yet.

  14. Duncan Smith

    I agree shorting isn’t a good idea with the current cot numbers. Waiting on the side lines seems to be the best move for now if at all bearish. Looking at various charts long term, DJI, S&p500, FTSE 100….. They look perfect for another crash all with perfect rounding tops/domes. I would become bullish if they move higher than the previous high. My question is how have the commercials performed in regards to predicting crashes. Where they massively short(COT’s) prior to the 2000 and 2008 crashes or were they caught unaware? My next question is where is the funding going to come from to support the next possible bubble in the markets? With QE exhausted as an option, and interest rates rising in the US I can’t see how the markets could accelerate to the upside. You could argue that the bubble started with the qe in 2009, especially as the Chinese markets have already crashed 40%. I remain undecided, and in cash patiently waiting.

    1. Gary Post author

      Actually Rambus lost money on 39 out 43 trades trying to short gold during the bear market phase. Which makes my point that it may even be harder to make money on the short side during bear markets than it is during bull markets.

  15. Bud Fox

    By the way I’m not here to always raz Gary but to provide a different view point. I have respect for Gary and he provides a service.

  16. Van

    Don’t necessarily agree with the sentiment of this post – but imo a good short candidate should have “obvious” potential for a 75% fall, not just a 20% correction. Tech shares in 2001, Housebuilders in 2005, GDX in 2011 etc. Of course everything is obvious in hindsight.

  17. Gary Post author

    If gold is going to give us one last pop to test 1300 this should be the setup to do it. I’m on the sidelines because I’ve already made “enough” on this trade, but I suspect the baby bull is going to kick the shorts in the teeth one last time before the intermediate cycle tops.

  18. Duncan Smith

    I found this, a pretty neutral stance on the S&P 500.

    For now, the S&P 500 has a cluster of Fibonacci resistance overheard, at 2022, 2028 and 2033. The S&P 500 can still top in this region, so investors need to exercise caution. If the S&P 500 is able to move through this Fibonacci resistance cluster, that would open the door for it to head up to the 2050-2062 area.

    As noted on the charts in the link below, support is in the 2005-2013 region, and based upon the current micropattern, a break below 2013 would begin to make us concerned about the larger bullish pattern. But, until support is taken out, the market continues to act as it would in a bullish market, as it continues to grind higher, despite “feelings” to the contrary.

    f the market is unable to extend this rally, however, we could be setting ourselves up for an (a) wave top as illustrated on the charts. So, the bulls have to step up very soon to push the S&P 500 through resistance, or we run the risk of falling down, and a a fall could be hard.

  19. Pingback: COT REPORTS - Smart Money Tracker

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