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Daily Speculations The Web Site of Victor Niederhoffer and Laurel Kenner Dedicated to the scientific method, free markets, ballyhoo deflation, value creation, and laughter. A forum for us to use our meager abilities to make the world of specinvestments a better place. |
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Book Review
01/26/2005
How to Make Money Selling Stocks Short, reviewed by
Allen Gillespie
The Chair forwards this review by a man of respect but demurs with all the ideas, and believes they are lures for suckers.
I find the work of William O'Neil very interesting, but his style difficult to emulate. Nevertheless, I picked up his new book "How to Make Money Selling Stocks Short" to see what tidbits of information it might contain. The book is very short with about 50 pages of writing and then about 130 stock charts. Here are a few thoughts and suggestions that I found interesting.
He first reviews his rules about determining the general market trend. He mentions his follow through day rules (a day that is up 1.7% on increasing volume 4 to 7 days after a market low). He writes the proper action to take on these days (whether to buy or to sell) is determined by the quality of the stocks breaking out of sound bases (stocks with accelerating earnings, sales, etc. he considers high quality) which moves him from a quantitative idea to a qualitative filter.
1) It is helpful if a stock has recently split, and
the large the split, the better. It is even better it
if it is the stock's second split during the last
couple of years. A simple test would be to compare 3
for 1 splits to 2 for 1 splits. We did this using the
SRC chart books (so it is not a complete dataset) but
found this to indeed be the case.
2) Don't sell short thin stocks.
3) The fact a stock makes a good sale does not make it
a good short sale and a cover does not make a good
buy.
4) Only sell short when the general trend is down.
5) After topping and a sharp break the stock "will
often attempt two to four rallies back through the 50
day moving average to the upside."
6) The optimal shorting point will, in the majority of
cases, present itself five to seven months after the
absolute peak in the stock. A test here might be to
screen for stock that are 10-15% below the 52 week
high and 5 to 7 since that peak was reached.
7) Former bull market leaders make good short sells
because they are over-owned.
8) Cyclical industries have a history of making for
good short sales.
9) Most good shorting periods are preceded by Federal
Reserve monetary tightening.
10) Set 20-30% profit objectives and take profits
often.
I found the book interesting for the simple fact it
address a topic seldom discussed in detail. While it
can rightly be argued that the examples are cherry
picked, it certainly allows on to build and test an
interesting dataset.
