The Hardest Trade to Make?

My pal Cody Willard has a very interesting post up this morning, with neat psychological ramifications: The hardest trade to make right? Shorting.

"Who’s more scared right now, the bulls or bears? The bears are terrified.

And furthermore, how idiotic do you feel when you ponder buying some puts? And getting net short this market? You’d have to be on crack, peyote, Vicodin, and Zyprexa all at once to be that nutty.

There’s an old saw on Wall Street about how the hardest trade to make is usually the right one. It’s hard to short right now. Feels stupid to even consider it.

Not just for this reason, but even as I remain cash heavy right now, I’m focused as much on finding good short ideas as I am looking for long ones."

Cody used to get a lot of grief from readers for his generally bullish views — but I find him to be a thoughtful analyst who can trade from both sides of the desk . . .


The hardest trade to make right now? Shorting.
Cody Willard, 4/20/2007 10:18 AM EDT

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  1. Richard commented on Apr 20

    bears have been losing their shorts for a while now. how many higher highs is it going to take to get you people to get on board? all those 50%+ cash folks must feel awfully stupid by now. by the way i came here during the last big drop and urged people it was a buying opportunity. hope at least someone listened…

  2. Michael C. commented on Apr 20

    I think the hardest trade to make right now is to go long.

    I think the easy trade is the short trade. Many people still think the crash is just around the corner and the consumer used their dollar yesterday.

    Market is overextended, softening economy, piss poor housing, rates going up globally, on and on…

  3. johntron commented on Apr 20

    FWIW (nothing much, If I recall correctly on the recent COT, small specs were massively net long on NQ, while large specs were net short.

    While on the SP, small specs were net short, while large specs were net long.

  4. super-anon commented on Apr 20

    bears have been losing their shorts for a while now. how many higher highs is it going to take to get you people to get on board?

    I’ve taken up significant short positions in the past several months. This morning my portfolio has risen about 2% despite the broad market being up.

    Of course I probably wouldn’t mention it, if I were down, but the point is that being bearish on US stocks doesn’t mean shorting SPY. The US economy has been slowing and this has lead to real financial distress for a number of companies out there. Seeing these problems coming has lead to substantial gains for those who’ve played them correctly.

    Ultimately making money is about being smart. Taking a position for the sake of being bullish or bearish is not smart. Neither is juding people on whether they’re net short or not. Just as people who’ve been long the broad market have done very well recently, so have people who’ve been short specific sectors or companies. If done with the proper insight, both these strategies were “intelligent”.

  5. Jay Weinstein commented on Apr 20

    Kudos to super-a for an articulate description of being a good financial analyst.

    It also helps to know if you are a chicken. I shorted a stock once. Everytime it ticked up, I wet my pants. Eventually it went to zero, but I have never done it since LOL

  6. Fred commented on Apr 20

    Given the massive amount of bearish bets placed — shorts/puts, it would appear that shorting is the easier trade right now. You never seen the majority make the hard trade.

  7. MAS (San Diego) commented on Apr 20

    Are you sure Cody wasn’t talking about shorting his hair? :)

  8. snooky chase commented on Apr 20

    yea, I caught CW’s comment end of day yesterday…and yes, that is how one has to think on the Street. See what they did to those tail end March shorts? Same with the tail end euphoric longs…I think someone makes a market in screwing those people. Lets talk somoe more about that $USD graph BR posted the other day. Let’s talk about that 80 level, the Dollar vs the Yuan…can China effect a floating currancy sooner or later? What happens to the Dolla? Gold? gold? gold? Inflation? inflation, inflation. Beuller? beuller, BUELLER!

  9. TheLarge commented on Apr 20


  10. snooky chase commented on Apr 20

    Regarding the $USD..I meant to add: Who is the Dollar’s Daddy? The Yuan, the Euro, someone in the Middle East? At some point Daddy would want to support the $USD. Yes?

  11. Fullcarry commented on Apr 20

    Given the human instinct to fade moves. The much harder trade is to go long a market making a new high.

  12. Gary commented on Apr 20

    Folks we are in the final blow off phase of this bull market. How hard is it to see that. The fundamentals don’t support this move for sure, but when did humans ever act rationally? There will come a time to short but its not now. Use pullbacks to cover and get long. Most uplegs last on average 6 months so we probably don’t top till July/Aug. Just be patient.


  13. lloyd commented on Apr 20

    I don’t see how anyone can argue that stocks are cheap. The broader US market looks inexpensive on P/E but that figure is being pulled down by financials and oil. Don’t just look at P/E in isolation. Price to book and EV/EBITDA are at nosebleed levels.

  14. Fullcarry commented on Apr 20

    If the dollar was to lose another 50% of its value, stocks could give you a modicum of protection.

    Note that the best performing stock market in 2007 was the one in Zimbabwe.

  15. lloyd commented on Apr 20

    also, total debt of non-financial sector US companies is at an all time high and rose 8% YoY in ’06. Balance sheet’s aren’t strong. Money is free right now just like it was back in the bubble. A more concerning difference now is that stocks can go to zero but we’ll be wearing this debt hangover for years to come.

  16. Adam commented on Apr 20

    Fullcarry makes an important point: stocks do provide the best protection against actual inflation (not the BLS’s bs inflation statistics). In my opinion, much of the recent (last year or so) rally is due to increased inflation, not real economic growth.

    I, too, agree that the S&P 500 looks expensive on a valuation basis. The Price / 7-Year Moving Average of Real Earnings is 22.5 – not a good value.

  17. BDG123 commented on Apr 20

    I’m not so sure going short is such a difficult trade be it here or anywhere. It’s tough if you don’t know what you are doing. If you have a good trading system and you have strong money management skills as part of that system, your trades don’t even need to be right more than half of the time. And, many good traders are never right more than half of the time.

    The problem is that most money managers don’t have good trading systems or sometimes even any trading systems that are anything but crude or allow too much risk.

    This is going to become a bigger and bigger issue and hedge funds are going to continue to lag the market even more than they have to this point for that very reason. Until now, it was just a matter of throwing something against the wall in energy, consumer stocks, industrials, M&A and emerging markets and positive returns were possible. Over the last six months, that window has narrowed considerably. From 2007 onward, I suspect hedge fund returns will drastically underperform for some period of time. The market dynamics are not conducive to their strategies and now only those who are extremely nimble and sophisticated will continue to meet market returns or better. That does not describe the average hedge fund. So, bigger bets, more wrong bets, lower returns. It’s time for a shakeout in the hedge fund business over the next three to five years.

  18. Red Pill commented on Apr 20

    Smart money, dumb money. Big money, small money. Rational money, irrational money.

    I know I am small, rational money. I really don’t know how smart money I am yet. Things seem irrational overall out there, but I fear big, smart money that knows things I do not. I don’t know how smart gold is, but I understand why gold bugs like it. Is there anything us small money people can go to that can’t be manipulated?

  19. sam commented on Apr 20

    do you guys prefer shorts (naked) to buying puts? hassle of IV/expiration and all other options mumbo jumbo..

  20. Ben commented on Apr 20

    My money’s with Gary. I’m going witht a modest bullish exposure until July/Aug, at which time I’ll load up on puts/shorts (maybe even the same ones that burned me last year)

  21. Ben commented on Apr 20

    My money’s with Gary. I’m going witht a modest bullish exposure until July/Aug, at which time I’ll load up on puts/shorts (maybe even the same ones that burned me last year)

  22. super-anon commented on Apr 20

    It also helps to know if you are a chicken. I shorted a stock once…

    I think this explains the huge short interest on the index ETFs. Nobody’s going to announce a buyout of the S&P 500, so it might seem to be a safer short to beginners and the risk-averse. But I think that may be backfiring for some bears and creating a bottom under the major indicies (this morning looked a bit like a short squeeze to me). It might also mean that individual stocks represent relatively better short opportunities.

    Who’s more scared right now, the bulls or bears? The bears are terrified.

    Shorting isn’t that scary if you’re properly capitalized.

  23. Bob A commented on Apr 20

    Boy, Cody can really rattle off the names of those drugs can’t he?

  24. ManhattanGuy commented on Apr 20

    Blah blah.. you bears continue to lose despite all your doomsday predictions. When are you going to learn? Earnings look good so far and market continues to perform well. . I won’t be bearish until there is something to worry about..

  25. S commented on Apr 20

    It’s sorta ironic to read the post immediately preceding this one in which you highlight how short interest on the NYSE is at an all time high. That post is followed by this one in which Cody is quoted as saying shorting now is a hard trade.

  26. Craig commented on Apr 20

    Shorting an index is essentially timing a top. How good are any of you at that?
    It’s just a statement of fact, not a political or financial stance.
    The market has an upward bias, that makes shorting and picking tops harder than going long.

    And anyone that starts with “You bears” or “You bulls” is just goofy.
    The markets have sectors and cycles, some do well while others do not. If you can’t see both sides please don’t reveal your shortcomings by making goofy statements.

  27. Philippe commented on Apr 20

    Few observations
    It is a postulate to consider those stocks markets as real markets (I will skip all contrary evidences which were developed documented and mathematically sustainable in previous BP posts) or to try to expand on financial logic or economics rationales (they have no sense since long for the bonds and stocks)
    These markets have great strength
    They are immune to external chocks, news or material evidences (lower profits, lower GDP, higher euro exchange rate against dollar Yen, steady to higher interest rates etc)
    They have been organised like a train (the start up in September was difficult few markets had slippage the SMI had a slow start)
    They have an agenda: long term interest rates and the rebalancing of exchange rates?.
    A weakness their strength
    The blind is leading the blind and if there is dislocation (which they cannot afford) the whole train will derail.
    In conclusion wait for the dislocation it will come.

  28. Turbo commented on Apr 20

    Out of curiosity, does anyone know how many times the Dow has been up 15 out of 16 days? I would imagine it’s fairly rare, and probably not a bullish indicator, but does anyone have any emperical evidence?

  29. Incognitus commented on Apr 20

    Short Interest isn’t high, if you take into account the much larger pool of money being managed by hedge funds (which do hedge sometimes), or even long-short/market neutral funds.

    Indeed, if one takes into account that trend, shorting is probably surprisingly low … that would be interesting to analyse (if one could get the data).

  30. stylizedfact commented on Apr 20

    I find ketamine works well. With Steven Schwartzman making magazine covers, backed by articles describing how the Blackstone team bring their A-game to the table, I’m short high yield bonds.

  31. Winston Munn commented on Apr 20

    Gary, I have similar views, although I think it could stretch a tad further into Sept/Oct.

    For the more bullish:
    Blanket statements and generalizations about the bounding market to me sound more like the racket from a cheerleading squad rather than thoughtful analytical comments. The plain fact is that market tops do not occur in one giant collapse – the begin to collapse stock by stock, industry by industry, while the overall market can still be moving higher. The start of the top is not the zenith, it’s when, looking back, you can see that the first industry group rolled over and didn’t bounce back. No one can know that this market is topping – it is after the fact that it can be seen; however, there are early warning signs that the market “may” be topping, but that topping can take 1 1/2 years to completely form.

    If you think going long right now is the riskiest trade to make, you must be basing your trade on nothing but hope. The fact you consider it risky must mean you see no valid reasons for the markets to go higher, but you hope irrationality continues to prevail.

    There is also a vast difference among shorting indices, shorting individual stocks based on fundamental problems, and shorting individual stocks within certain industries because those industries have rolled over.

    Not to put words in Mr. R’s mouth, but the comment about shorting being the riskiest trade right now has to do with the liquidity, exuberance, and disdain for the divergence between market action and the fundamentals of macroeconomics the market is showing – it is a comment based on Keynes statement that markets can stay irrational longer than you can stay solvent.

    I have individual stocks profitably shorted right now, and also some long positions. The shorts make me more nervous, although they are far away the biggest winners, simply because of the possibility of an M&A rumor that can blow me up, an irrational reaction to data that itself is irrational can send me to the bench with a towelf over my head, and the fact there is so much liquidity to keep the party going no matter how right my position is loose money with no home can make it wrong. For my long positions, all I have to worry about is that there will be more sellers than buyers.

    And last, I am not certain how much importance can be placed on the number of puts. No one can tell how many of the puts are hedges. If 50% of the puts are hedges, they neutralize each other do they not, and so do not give a a meaningful long-term floor to prices, because while the options are excercised, the corresponding long position is sold. A net washout – a built in buyer for those shares but not my shares.

    Thus end the current rant. No offense meant to anyone.

  32. angryinch commented on Apr 20


    The last time the Sow Jones was up 15/16 days was in Dec91-Jan92. It topped out at 3,201 on 1/3/92 and pretty much flat-lined for three months. Then made a top at 3,407 in early June (6% higher), then fell 8% over the next four months. Net/net, the market went nowhere for 10 months.

    Excruciatingly small sample size. But essentially the last time the Sow was up 15/16, it lead to a 8% trading range for 10 months.

  33. mr thin-skin commented on Apr 20

    Dear readers,

    I perceive a slight decrease in politeness on this board. (Less so this thread than some others.) Let’s not turn this into Yahoo. Please?

    I like reading different viewpoints — but not disparaging remarks.

    Thank you.

  34. Incognitus commented on Apr 21

    Regarding the “huge” number of puts being traded, a few important things:

    1) When you value weight the Puts and Calls, the Put/Call ratio is almost always below 1, even for Indexes, where a lot of hedging explains the higher Put/Call;

    2) In equities the Put/Call is always below one any way you look at it, meaning speculation is always to the upside.

    3) Even in indexes, there MIGHT be some new strategy of massively selling puts (especially out of the money puts). The latest rage in Credit is selling credit protection (Puts, actually) … who is to tell us the same isn’t happening with Equities? Indeed, there are studies saying selling index puts beats an outright long position (more or less the same return, less volatility).

    Remember, if this strategy is out there massively, the hedging of SOLD puts actually creates an upward bias for the market (if the puts are bought by an hedged player he will have to buy stock/index to compensate for owning them).

    So the question remains, are these puts being BOUGHT or SOLD?

    Finally most puts traded are out of the money or deep out of the money, making me believe they are either part of this strategy or just hedges, while most calls traded are closer to the money or in the money, meaning they are upside speculation.

  35. tomorrowisforever commented on Apr 21

    Sentiments exactly. We are in a situation where you can be a fool to go long and a fool to go short. Is the market poised to go higher because economy is doing swell? How did everyone feel in early 2000 about the market, their portfolios and general goldilocks environment? I truly think we are seeing how a form of inflation can make its rounds and move into the neighborhood. Next thing we will see is the inflation in common goods that we use day to day.

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