Newsgroups: misc.invest,misc.invest.stocks,misc.invest.technical,misc.invest.canada,comp.ai.neural-nets
Path: cantaloupe.srv.cs.cmu.edu!das-news.harvard.edu!news2.near.net!MathWorks.Com!europa.eng.gtefsd.com!howland.reston.ans.net!swrinde!news.uh.edu!news.sccsi.com!nuchat!texhrc!sjstat!gpcsjs
From: gpcsjs@sjstat.NoSubdomain.NoDomain (Stanley J. Sramek)
Subject: Re: Dow headed through 4000, whee!!
Message-ID: <1994Sep2.212501.25272@texhrc.uucp>
Lines: 63
Sender: news@texhrc.uucp
Nntp-Posting-Host: sjstat
Organization: Texaco Inc.
References: <33i81h$g8j@dawn.mmm.com> <33j1ot$eg8@freddy.cna.tek.com> <33jguk$9hu@ornews.intel.com> <33liuu$t5d@lll-winken.llnl.gov>
Date: Fri, 2 Sep 1994 21:25:01 GMT

In article <33jguk$9hu@ornews.intel.com>
chedley@carthago.intel.com (Chedley Aouriri) said:

>This blow-off has been triggered by the shorts running for cover.
>Traditionally, that's the last gasp of the bull. Now that the shorts
>are being squeezed, nobody's left to fuel stock prices higher.
>And don't count on Greenspan to help the bulls!!

In article <33liuu$t5d@lll-winken.llnl.gov>,
jay@concannon.llnl.gov (Jay Hartley) then said:

>I don't quite understand the logic of this. Why would shorts be
>running for cover if the bull is dying? And if they did, that would
>mean a rash of _selling_, which should drive prices _down_ instead
>of up in a "sucker rally."

I (Stanley) now say:

Nope. "Shorts running for cover" generates -buying-, not -selling-.
"Shorts" are people who have "shorted" stock, because they think it is
going to go down.

"Shorting" means borrowing stock without paying for it, and then selling
it to someone else. The person who is "short" has to eventually return
the stock to the person from whom he/she borrowed it, which means that 
he/she has to eventually buy it back in order to be able to return it.
But, if the stock went down as expected, he/she pays less for the buy-
back than he/she received for the original sale, and thus makes a profit.

Now, suppose that the person shorting is wrong, and the stock goes up
rather than down. In that case, he/she -loses- money. If the stock
continues to rise, all persons shorting that stock have to eventually
"run for cover," meaning that they have to buy the stock back at
a higher price so that they won't suffer any further loss. Remember:
if you "short" a stock and the stock then goes up rather than down, your
potential loss is theoretically unlimited because theoretically there is
no limit to how far the stock can rise. Eventually, in order to stop
your loss, you have to "run for cover" by buying the stock (at an
exorbitant price).

Anyway, this buying by shorts "running for cover" drives the stock up
further.

The concept of shorts "running for cover if the bull is dying" is based
on a contrarian investment philosophy. The point is that the shorts don't
-know- that the bull is dying; they think that it is going to continue
forever. According to contrarian philosophy, the bull peaks when optimism
about the market is greatest. Since people who "short" are normally the
most pessimistic people in the entire market, then, when they give up and
decide that the bull is going to continue, it is a contrarian indication
that optimism about the market has reached its greatest point.

************************************************************************
*  Stanley J. Sramek                             My posted statements  *
*  Texaco Inc.                                   do not reflect the    *
*  Houston, Texas, U.S.A.                        views of my employer. *
************************************************************************
*  "Happy the man who follows not the counsel of the wicked, nor walks *
*   in the way of sinners, nor sits in the company of the insolent,    *
*   but delights in the law of the Lord and meditates on his law day   *
*   and night."                                                        *
************************************************************************
