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[sharechat] Short selling answer to Cris.

From: "Allan Potts" <>
Date: Thu, 25 Mar 2004 00:37:48 -0500 (EST)

Hi Cris,

In the US regular stocks can only be sold short on an uptick in price.  This is 
an attempt to slow the downward spiral you allude to.  This however, does not 
stop people from shorting and shorting and shorting and driving the stock down 
as there will be many downticks in between their shorts.

The first step to defeating shorts that are driving down a fundamentally good 
stock is to keep track of the total volume of shares sold short.  As an 
example, (numbers made up for simplicity) let's say there is a float of 
15,000,000 shares with another 5,000,000 closely held by people who are just 
not going to sell. (Family, trust funds etc.)  Some guys decide to short the 
stock at say $100.00 per share, drive down the  price to $50.00 and buy back at 
that price. (covering their shorts)  As the short position builds, you realize 
what's going on and keep track of the number of shares sold short.  Over here 
they are published regularly, so it's relatively easy to keep tally on them. 
You learn that they have sold 10,000,000 shares short.  This represents 2/3 of 
the float and 50% of the totality of shares issued.  The price of your 
fundamentally solid stock is now say $60.00, but they're still trying to drive 
it to $50.00 and you know it's worth $100.00.

Buy as much as you, your family and friends can possibly afford and go to chat 
sites letting everyone one who will listen know that the shorts appear to be 
beating the price of shares down in order to   profit from their short sales.  
Result "A SHORT SQUEEZE".  Since your purchases will be driving the price of 
the stock up and the shorts are committed to cover their shorts at some point 
the rise in value will be tolerated at first, but as it nears say $80.00 and 
they see their profits evaporating, they will panic and try to get out.  To get 
out, they have to buy, which further drives the price up and adds to their 

Now this is a simple example to illustrate the basic principal.  It also 
explains why bear market rallies are so quick and violent.  It's the shorts 
attempting to exit their positions.  Actually the reverse of a panic selling 
crash. Over here there are services that continually watch for large short 
positions building in stocks that are sound and increasing in price.  The 
higher the short position the better, because it guarantees a Hugh reservoir of 
buyers to further push prices up when the squeeze starts.  Actually it's fun to 
watch when you've taken the long position and watch the stock jump 10 to 40% in 
one day.

On the other hand when you've shorted a stock because you think it's a dog and 
along comes a buyout offer 25% higher than the market   price -- you get 
killed!!!!  I've been through both situations.  Hope the illustration of the 
general principal helps -- on the other hand you may already know all this.  I  
pass it along because I know that short selling is not as widespread in the NZ 
and Aussie markets as it is here, where just about anyone with a margin account 
can short a stock that is available to be shorted.



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