How To Short The Market

Over the years, I've fallen victims of bears being devoured by the market.  The dot com era was particularly painful.  No short positions survived to see the subsequent bear market correction.  Here we are again, no double dip for the 2009 bear market.  As a matter of fact, the Dow Jones Industrial index has exactly doubled from the 2009 low.  Even with the Euro on the verge of collapsing, the market simply padded its knees and continued climbing.  The Greece bailouts were simply gimmicks to trap the bears.  I never learn.  You can do better.  Learn from my costly lessons!

Don't SHORT the market!

• If the market goes up most of the time, why play the odds that's against you?
• It's unpatriotic.  All the presidents want the market to go up, especially for his re-election. It's just short of treason to fade our president.
• Until it's time to bust the market, the financial elites, with their insatiable greed, want the market to keep booming and increase their wealth indefinitely.  How many time have you seen the market busted?
• Don't go against the Fed.  Just like no politicians want to stick his neck out and increase income taxes, no Fed chairman wants to stick his neck out and let the market take its natural course.  
• It's plain harder to short than to long.  Just look at any paid services or ask any professional money manager. I can guarantee their winning percentages when going short are a mere fraction of their winning percentages when going long.
• It's the naughty thing to do.  Like a tot, the more the rule says don't, the more he wants to do it.  The market is trending up, but the naughty ones just want to fade it.  Naughtiness is in our blood.
• Even without the injected liquidity by the administration, the market has a trick called sector rotation.  Sectors are hyped up to boost the indexes; when they got too hot, simply rotate to other sectors. And so forth. In the process, the market grinds higher even as individual sectors correct.
• A longer term "scam" is index rebalancing.  The S&P 500 (or any other index) will replace a stale declining company with a prospering company.  Tell me this favors the bulls over the long run!

If you cannot resist being a glutton for punishment (see Bears Are Meant to Suffer), follow the following guidelines religiously and you may get lucky.  Note: Day trading is the exception to the following guidelines.

• Always scale in, recognizing that that topping is a process and may take weeks if not months.
• When scaling in, do it in very small sizes and over a long period of time.  For some reason, I tended to be more aggressive in number of shares when I shorted, and I got run over by the market almost without exception.
• Sell naked puts on a inverse ETF if available. (e.g. SH for short S&P500. The volatility is low now but you can still sell ATM put for $.50 that expires 3 weeks away.) Chances are you'll be assigned shares at expiration; if not, at least you walk away with the premiums in the pocket.  Build up your positions slowly this way is even better.  Just make sure you have you enough funds to buy these shares at the strike price, should they be assigned.
• Buying puts may seem safer, but it's deceiving because although your losses are limited, your contracts will most likely expire worthless.  Essentially prepare to lose 100% of relatively smaller amount of capital if you plan to buy puts.  Time works against you.   
• Avoid leveraged ETF's as many have to settle daily and will lose value over time even if the market stays flat.  Especially if you are prepared for a longer term swing trade, these would not be the best vehicles.
• Take profit quickly -- unlike longs where taking quick profits may be a cardinal sin.  Being short is like fishing; you have to be in to catch the market dips. You line the baits and wait; once baits are taken, you wheel the fish in right away.  Fear is a stronger emotion, when it comes, it come strong and quick. Don't get greedy and overstay your welcome.
• Be late at your timing.  If you think now is a good time to add to short, delay it by a day or even just a few hours will do you some good.  Remember, people (the bulls) are almost never tired of being greedy, and the market tends to grind higher.
• In light of sector rotations, may be you have a little more edge if you short sector funds instead.
• Oh, don't forget to hedge with token shares of spec longs.  You'll need them for the much needed psychotherapy during your grueling conquest.

Please feel free to add any other advice.