The Market Don’t Want No Short People

By LV

Short people got no reason
Short people got no reason
Short people got no reason
To live
They got little hands
And little eyes
And they walk around
Tellin’ great big lies
They got little noses
And tiny little teeth
They wear platform shoes
On their nasty little feet
Well, I don’t want no short people
Don’t want no short people
Don’t want no short people
Round here
–        Randy Newman
Public sentiment is stacked against those who take short positions in the market.  Shorting involves selling borrowed shares with the intention of buying the shares later in the open market at a lower price, thereby netting a profit in the process.  Unfortunately, the “shorts,” as this group is commonly referred to, are frowned upon and find themselves at a decided disadvantage when they transact short trades.
The main reason for this attitude is that most market participants, such as mutual funds and retail investors, buy and hold stocks for the long term.  Although some investors hedge their long positions by implementing shorting strategies, there is no stigma associated with shorting for this purpose.  Indeed, it is considered a prudent measure to protect one’s investment.  On the other hand, direct sell-then-buy shorting is scorned.
There is no sympathy for shorts when their trades work against them.  In fact, there is palpable glee, a certain schadenfreude, when short traders (some would say, traitors) get washed out when they try to capitalize on the misery of stalwart long-term investors.
If the market goes down precipitously, losers can always turn to the Federal Reserve, the Securities and Exchange Commission, Congress, or the media to lend a sympathetic ear.  Our congressional representatives want to know what can be done to stop the hemorrhaging because a large percentage of their constituents hold long positions in their 401k, IRA, or individual brokerage accounts.  Indeed, most congressmen hold long positions in their own accounts.
No such sympathy is extended to shorts.  Nobody goes to bat for them.  Shorts are regarded in some circles as predators.  Some investors even denounce shorts as unpatriotic because shorting the market, in their view, is tantamount to shorting America.  Shorts are the Rodney Dangerfields of the marketplace.  They get no respect.
Investors who suffer big losses have support groups that provide solace when the market turns against them.  They can tune into CNBC where there are always a bevy of cheerleaders to lift their spirits.  Any market decline, no matter how severe, is considered a buying opportunity as far as they are concerned.  And, if the market happens to be setting new record highs, they recommend buying the all-time high.  Every once in a while CNBC features a guest who has the temerity to espouse a bearish view.  Within seconds, the masochistic guest is run over by a Peloton fleet of bullish panelists.
Shorts can’t catch a break.  The risks associated with taking a short position are manifold.  These risks include the unique drawbacks associated with a short sale, the unfavorable rules imposed by market regulators on shorting, and a rigged market that aggressively militates against shorting.  Let’s take a look at each type of risk.

1. Shorting stocks is inherently more risky and, therefore, susceptible to larger losses and surcharges than buying stocks.  The most an investor can lose when he buys shares in a security is the total purchase price plus commissions.  Conversely, a person who shorts a stock can suffer unlimited losses since the stock price can theoretically go to infinity.  Short sellers must pay stiff interest rates when they trade in their margin accounts.  Further, their short positions can be involuntarily closed out if they fail to meet margin calls when the stocks they shorted rise significantly higher and they get caught in a dreaded short squeeze.  Short sellers must also pay dividends to the owners of the shares they borrowed.

2. The rules imposed by market watchdogs adversely impact short sellers.  The SEC has implemented rules that favor investors who take long positions over traders who short stocks.  If a stock drops more than 10% from the prior trading day’s close, the SEC imposes the so-called uptick rule that prevents short selling of the stock, except on an uptick from its previous sale.  The uptick rule slows short sellers from aggravating a price decline.  But why isn’t there a pesky downtick rule to slow a stock’s upward momentum?  Buyers can chase a stock’s price to the moon without pausing for a downtick, but short sellers can’t chase a stock to hell without pausing for upticks along the way.  The direct shorting of stocks is not permitted in IRA accounts because margin accounts are prohibited.  Retirement accounts are short-free zones.  These types of regulations skew the playing field in favor of the bulls.  The SEC has taken sides.  Longs are good.  Shorts are bad.
3. The market is rigged against short sellers, making it the biggest risk they face.  Ask traders who have consistently taken short positions in the market since March 2009 how well those trades have worked out for them.  The answer is they have been squeezed and crushed mercilessly.  They would be lying, if they say otherwise.  Over the past eight years, one reputable market analyst after another has called for either a market crash or a significant market pullback and has been consistently wrong.  Technical analysts have learned through bitter experience that market predictions based on chart theory yield unreliable results that can be hazardous to their clients’ financial health.  This is because technicians base their analyses on data, in the form of market price and volume, which many observers say is corrupt — by the Fed at the macro-level and by manipulative high-frequency traders at the micro-level.At the macro-level, the strong correlation between the Fed’s rising balance sheet and stock market’s climb to record highs speaks for itself.  http://www.acting-man.com/blog/media/2016/02/1-stocks-vs.-Fed-balance-sheet.png  Easy money fuels a bull market and the Fed has been throwing printed money around like there’s no tomorrow.  When the Fed puts its money squarely on the side of the longs and has the firepower of the printing press at its disposal, it is time for shorts to abandon the field to the longs or risk getting steamrolled.  This is market plunge protection and gives lie to the concept of a fair market.  The market may crater in the future but it won’t be because the Fed did not try its level best to prop it up.  Fair price discovery is missing in action.
   At the micro-level, high-frequency traders routinely front-run investors to score statistically-improbable consecutive gains.  Computer algorithms incorporating pump-and-dump software churn out nickels and dimes in huge volume from honest shareholders.  More than half of overall market volume involves high frequency trading and a fair amount of this algorithmic trading tends to distort the prices of individual stocks that make up the market.

The twin forces of Fed intervention and manipulative high frequency trading deceive market technicians, who predict market tops based on corrupt data.  Garbage in, garbage out.  Frequent forecasts of approaching market pullbacks attract short sellers who wind up driving the market higher when they get caught in cascading short squeezes, which propel share prices higher and higher.  Short sellers swept into this vortex suffer crippling losses.
 
Based on the strong headwinds facing short sellers, shouldn’t they be granted a certain degree of begrudging admiration for their courage?  Unfortunately, the answer is no.  Courage is not to be confused with stupidity.  Shorts are dumb for fighting the Fed and fighting the tape. They deserve what they have coming to them.
So what are shorts to do?  No reasonable person can deny that shorts are victims of institutionalized bias and other factors. A market tilted in favor of the bulls violates the bedrock principle that market forces and market forces alone should decide whether stock prices go upor down. The market cannot be the cornerstone of our capitalist system if one side of a trade is favored over the other.  Our government should keep its heavy thumb off the scale of greed and fear that drives the market.  In a fair market, shorts should be treated the same way longs are treated.  It would be unfair, even un-American, to have it any other way, no matter which way one thinks the market is heading.
If short trading in the market is so repulsive, it should be treated like cigarette smoking.  A public disclaimer should advise short traders that their trades could be hazardous to their financial health since market regulations, monetary policy, and public opinion are stacked against them.  After all, shorts are people too.
Shorts should go long or go home because the market don’t want no short people.