Is it better to short the market or convert assets to cash and wait for bargains to emerge?

As a hedge strategy, if you're expecting or afraid of a market downturn

Many pros prefer to short in a bear market. If your going to sell short the industry group needs to be negative, and unless it's a news play where shorting a stock with bad earnings news, or accounting irregularities, I like the market to be negative. Over the years, I have learned that going with overall market direction is a lot easier. Many traders know that it's easier to trade in the direction of a trend than against it.

I wouldn't short a stock with an 80 or above IBD composite ranking. Also, much of a stock's movement has to do with the overall market direction and the industry group it's in. The broader market's mood and manner (bull or bear market) and the current favorability of the industry group where it resides can inflict a lot of pressure on a stock's price behavior.

The mistake that most people make is shorting at support levels. The stock will go to its high and start to drop. When many people see it hitting support levels, they will short. This is a big timing mistake. You should wait until the price breaks through support before shorting, but not at support. Support is the price level at which a stock's price has stopped falling and either is moving sideways or has reversed direction. The demand for the stock is thought to be strong enough to prevent the price from dropping further.

One popular strategy among traders is to short failed breakouts, called fading the gap. When traders "fade" an opening gap, they trade against the prevailing move. Example: If a stock opens a point higher than it closed the night before, traders sell short the gap up within the first few minutes of trading. A volatile market creates a number of opportunities to play these kinds of reversals. Many people use opening gaps to sell short. It is an effective method in the hands of experienced traders, but you can also get hurt using this strategy. Misreading volume, market internals and other indicators during a volatile gap opening can cause traders to lose a lot of money in a short period of time.
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You'll make more money on the way down by shorting then by having money in cash.

shorting the market may put you in an infinite risk.
However instead of selling property you may sell a put option that would bring you money at once, and could be covered by selling other property if getting exercized. The risk is limmited to the strike price of the stock that you sold the option. if you do get exercized it would be in the rate that you would be happy buying that stock!

Depends more on your tolerance for risk and ability as an investor. Shorting the market can be very difficult to predict and also very risky since there is no cap on your losses if the market keeps going up. I would search for bargains/value and keep a long term view of your portfolio. It is very difficult to beat the market in the short term, especially when you consider trading fees and taxes.

It might not be a bad idea for hedging risks, but there are other ways to hedge. Some stocks and mutual funds will have a beta close to -1, which means it moves inverse to the market. You might want to look into that instead of shorting.

Another good question Yardbird. Certainly shorting the market is a good hedge strategy but is somewhat risky. Another option is buying puts which limits your risk but does cost you something. Timing is a real problem with shorting. You can be 100% right but your timing can be off and as the market continues to go against you, what do you do? As soon as you cover your shorts, then the market collapses.

My personal opinion is that puts are the least risky hedge. So they wind up costing you maybe a couple of thousand if the market does not roll over, but the returns from the rest of your portfolio should many times over make up for the loss.

The problem with pulling your funds out of the market is taxes and also the possibility that you are mistaken. Back in 1998 I was absolutely convinced the market was ready to collapse. But heck it didn't untill 2001.

Short individual stocks, not the market. If you think things are going south, think about what sectors will get hit and choose the top stocks in those categories. So, in tech, choose HP, Microsoft...in pharma choose Pfizer, Merck..etc. These follow the market up or down in a crash. Choose your favorite top stocks and start following them now so you know their price ranges and you can have some accuracy in choosing the best time to short.

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