I have done a LOT of short selling in my life. In my previous career I ran a hedge fund of one sort or another from 2006 to 2021, so a 15 year continuous stretch. I was long from 2006 to 2007, then short 2008 to 2010, when briefly long, and then went short again, where I stayed short until 2020. I probably should have gone long in 2016 - but that’s another story. In 2013 and 2014, we were probably the only fund in London to still be net short - so much so that the GS stock loan desk took us out for Christmas drinks. Apparently we were there best customer by far.
I was short Volkswagon all through its squeeze, and eventually made (a small amount of) money on it. That was unpleasant.
I also tried and failed to short oil in 2008, putting on shorts in Petrobras in early 2008, but getting squeezed out before it collapsed.
Actually my ideal short is a cyclical stock you run long all the way up, and then switch to short when the fundamentals breakdown. The reason I am thinking about this is the ongoing momentum bloodbath in markets. The GS High Beta Momentum Index has lost 43% in just over over a month.
The only comparable move that I can remember was 2008. There was a mini one I was on the right side off in 2016, but 2008 was the really big one.
What happened in 2008, was that as the GFC started to unfold, the Fed starting cutting interest rates, which weakened the dollar. The China boom was still going, so commodities, and specifically oil and iron ore were going to the moon. But as recession took hold, this cyclical stock that has attracted momentum money got destroyed. Looking at SK Hynix and other memory stocks, its easy to see this type of market again - down 50% this month.
The thing is that back in 2008, the commodity stocks moved one for one with commodity prices. Petrobras peaked around the same time as oil. Vale peaked around the same time as iron ore.
This time the memory stocks have pre-empted a fall in the underlying. Memory prices are still at or very near all time highs.
Or to put it another way, Micron stock is falling even as earning expectations are being revised up.
The obvious short case is that hypercalers CDS is beginning to sell off and this will cause Capex to fall. I would be a bigger believer of that if I was seeing long dated bond yields falling - the market would be agreeing that recession is coming.
But if you do want to short memory stocks, I can offer one interesting argument. Before memory stocks became THE AI play, power equipment stocks were THE AI play. In the US, GE Vernova was the go to play. It is weak in July - but not broken - not yet anyway.
Koreans being Koreans, pushed their own electricity generation equipment stock up 700% in a year, but has halved in the last 2 months.
Chinese electricity equipment maker, Harbin Electric, peaked in February, and then halved before bouncing a bit this month.
There is a reasonable argument to say Asian stock markets are a lead on the US. As they make physical goods, they tend to have a longer lead time, and can see when things slow earlier. Sometime the Kospi does seem to turn well before the S&P 500, and sometimes it seem to be simultaneous.
One of the big problems with this analysis is that other reliable “tells” on the market do not really work. Normally the time to buy Korea was when its currency began to appreciate, and sell when it weakened. In this cycle, Kospi has soared as the currency has weakened, and fallen as the currency strengthened.
What I am trying to say is that short selling is hard. I used to only take on shorts when I could see three different catalysts to make money. Right now in memory stocks, you need to memory prices fall. And to make that work, you are basically saying that the hyperscalers will see their rising CDS and decided to cut capex aggressively. I would bet on that if I saw their core businesses going into decline - but I don’t see that (yet). Or if I saw recession - but I don’t see that yet either.
