All Stories

The dangers of shorting – look at the FTSE 250 today

Tom Winnifrith
Tuesday 19 June 2012

Some of the moves in the FTSE 250 today are awesome. Home Retail up 25%. Dixons up 12%. Carpetright 7%. These are not penny stocks but billion quid enterprises. This is a short squeeze in action and a warning to all those folk who think that shorting can be a one way bet.

You can understand why someone would have been short of retail stocks such as these. I do not need to go into details. But that in itself caused massive short positions to be built up in all three stocks. Then we get a decent ( or rather less bad than expected) trading statement from Home and off we go. Some folks actually want to buy the bombed out shares. Meanwhile those with shorts start to get margin calls/worry they may have got it wrong and the sheer fact of such an enormous short position being even partially unwound creates yet more buyers. With no sellers – whoosh up goes the price and more margin calls start to be made. Throw in the fact that the market as a whole is being boosted by talk of base rates being halved to 0.25%/more QE across the globe and it is a day when certain bears will have been burned badly.

This is the danger of shorting a stock which everyone else is also shorting. And one suspects that some of those short Dixons, Carpetright, Supergroup etc are now twitching nervously and cutting their exposure too. If you short a stock that is genuinely grotesquely overvalue/going bust thenyou should make money. Simply shorting because everyone else says it is a short and is doing the same can prove ruinous if, as today, a bear squeeze sets in.

If you enjoyed reading this article from Tom Winnifrith, why not help us cover our running costs with a donation?
About Tom Winnifrith
Bio
Tom Winnifrith is the editor of TomWinnifrith.com. When he is not harvesting olives in Greece, he is (planning to) raise goats in Wales.
Twitter
@TomWinnifrith
Email
[email protected]
Recently Featured on ShareProphets
Sign up for my weekly newsletter








Required Reading

Recent Comments


I also read