Trade Like an O'Neil Disciple: How We Made 18,000% in the Stock Market

Chapter 6. Riding the Bear Wave: Timely Tools for Selling Stocks Short

In essence, our short-selling philosophy is the mirror image of our upside, bull market philosophy where we seek to capitalize on the huge upside price moves in the "big stock" leaders of any bull market cycle. For us, short-selling is simply playing the second half of what we can think of as a stock's "life cycle." Young, entrepreneurial companies start their life cycles off with a bang as strong fundamentals, new products and services, and dynamic new industry conditions help them to gain a strong institutional following as mutual funds, pension funds, hedge funds, and other large, institutional investors take positions in the stock. Systematic and sustained institutional accumulation of a leading stock drives the stock price inexorably higher, resulting in your classic O'Neil–style "big, winning stock." As the company matures and conditions change, such as the emergence of newer, more efficient, competing technologies, processes, or concepts, the flow of institutional money into the stock will inevitably slow. In some cases, the company merely becomes a slow-moving, underperforming "has-been." In other cases, and those that typify the kind we are most interested in, that institutional money flow can reverse very sharply as the institutional investors that piled into an innovative, entrepreneurial young company on the upside quickly begin to pile out. When institutions begin exiting their sizable positions ...