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The Folly of Shorting Stock in This Bull Market

In a stock market many deem overvalued, it’s tempting to be shorting stock. Here are a few reasons why that would be a giant mistake.

As the U.S. stock market climbs further into record territory, investor concerns over a sudden comeuppance swell. To some, shorting stock in anticipation of the Great Fall to Come is the answer. Doing so, however, would amount to little more than guess work.

In the same way that investing in IPOs the minute they come public is based on little more than a hunch, shorting stock is a bet that a certain company, or the market as a whole, is about to go in the tank. And if you’ve been paying attention for the past eight months—or, really for the last five or six years, the market has been incredibly resilient, valuation be damned.

These days, U.S. stocks don’t seem to care who’s in the White House, what’s happening in Europe or China, or that so many experts think they’re overvalued. The bull market keeps plowing ahead, with little more than a few toe stubs to show for it. And as my boss, Cabot Wealth President and Chief Investment Strategist Tim Lutts, is fond of saying, “Trends last longer than people expect.” Right now, the trend in the stock market is up. Calling a top would go against everything we’ve seen since November.

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Wells Fargo (WFC) equity strategist John Manley told Business Insider that shorting stock is “like playing with fire.”

He continued: “We expect the worst. It’s an old saying, if you expect the worst, you’ll never be disappointed. And no one’s been disappointed yet. Now they will be at some point in time. But I think that there’s still that wall of worry. Why hasn’t it gone down? When is it finally going to get it? This has been going on for five or six years. Maybe it’s tomorrow, but I’d rather see it tomorrow and sell it a week after tomorrow than try and anticipate it because anticipation has been the wrong thing to do.”

We’ve written extensively about shorting stock, including Tim Lutts’ “Seven Short Selling Tips.” His tips for shorting stock include targeting companies that have declining sales and earnings, or stocks with declining 50-day moving averages. But the two bits of advice from Tim’s article that pertain directly to this bull market are these:

  1. Only sell short when the market’s intermediate-term trend is down.
  2. Never (never!) try to pick the top; only sell short stocks that are in confirmed downtrends.

With the market in an intermediate-term uptrend, now is not the time to be shorting stock—even if you think the market is horribly overvalued. Instead, you should be capitalizing on this bull market, investing in the many great growth stocks, value stocks, emerging market stocks and small-cap stocks that remain. If you need help identifying the right ones (for all investment types), click here.

Regardless of what types of investments you prefer, now is the time to be long the market, not short.

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Chris Preston is Cabot Wealth Network’s Vice President of Content and Chief Analyst of Cabot Stock of the Week and Cabot Value Investor .