The following is an interview I had with blogger and professional short-seller Timothy Sykes:
Q: What should someone do right now?
Sykes: The odds favor doing nothing right now. The downside is so massive. If we can’t hold 11,000, it could start momentum. It could be a 10% off sale and people could pile in.
Q: What is so important about Dow 11,000?
Sykes: If 11,000 cracks, then we can see some true panic. Remember, this is just August. We didn’t plan on this. In all likelihood, this is just a precursor to a lot of trouble heading into September and October. We raised the debt ceiling but it’s only good to the end of the year. All we did was stall the inevitable. I don’t expect us to rebound to the highs and break out. Right now, all the momentum players are scared. You can be a dip buyer and make a few points here and there.
Q: Should you short this market?
Sykes: I never short market drops because it’s so difficult. Right now, it’s tough to short down here. The only angle I see is selectively buying strong stocks. You buy into strength and you short into individual strength. I short sell individual stocks that are being manipulated, but I don’t short the whole market.
I also like to trade overreactions. I find that whichever way the market is going, it tends to overreact. So I think we’re going to overreact on the downside. If we overreact in a bull market, people spend more because they’re happier. You have to be extra careful when the market is going down, like now, because a crash could lead to a depression.
Q: How about going long?
Sykes: I wouldn’t build long-term positions on either side right now. It’s better if you trade like a sniper, and be picky. The market is volatile right now. The fundamentals are saying we’re doing great, but the economy is saying we’re doing poorly. On the technical side, the charts are saying you should go short, but a long term short has never worked out well. So we have opposing sides. There is no consensus.
Q: What else should you watch out for?
Sykes: Watch out for earnings losers because they will get smacked the most in this environment. Dump any speculative stocks and focus on earnings winners. Stick with companies that have proven themselves. If the market moves higher, these stocks should move higher. Right now I like Rosetta Stone.
Q: What kind of trader are you?
Sykes: I like to trade like a coward. It’s not about who can make the most money the quickest, but who can employ risk management techniques to focus on survival and consistent profits. The idea is to remain liquid coming into these crashes. By managing my risk carefully and cutting losses quickly, I am not afraid. I’m always thinking of safety first, because it always protects me, even if I miss out on opportunities.