TWTR Shorts Should Cover

May 05, 2014, 10:15 am ET, BY Thomas H. Kee Jr- Editor, Stock Traders Daily| Editor: Thomas H. Kee Jr. (Follow on LinkedIn)

The best time to short stocks is not after they get decimated, but on strength, but that may not be the most popular time to take action.  The good news is that this business is not based on popularity.  It is actually the least popular move, the ones that the masses do not believe in, that turn out to be the best.

For example, ours was not a popular decision at the time, but late in December and in early January when Twitter (NASDAQ:TWTR) was trading around $70 a share Stock Traders Daily recommended shorting Twitter.  Since then the stock has fallen hard, resulting in significant profits for those who did not follow the masses.

The stock increased aggressively at the end of the year last year, but that was solely due to the catch up game being played by institutions that were lagging behind the stock market.

Late in 2013, Twitter was the ideal candidate to pump up.  Everyone was watching the IPO, on paper it fit directly in line with other high profile social media companies, Facebook (NASDAQ:FB) had finally started to gain traction again, and it seemed as if Twitter made conscious decisions to not flub like Facebook did after it went public.  Those, in addition to the public profile that already existed for Twitter made it very easy for institutions to pump this stock.  Who better to sell to than the hundreds of millions of Twitter followers anyway?

Needless to say, the hundreds of millions of Twitter users were prime candidates to buy the stock if they saw it performing well and as institutions bought the stock smaller investors also jumped on board.  This is a classic pump and dump example, that uniquely happened right in front of the public eye.

The reason this was possible is because those smaller investors who are still probably holding the stock from much higher levels forgot about the risks.  Many of them felt, or believe, or were fully sure that the stock would continue to increase aggressively, without doing any of the work.  Another reason is that the gains seen in the market during calendar 2013 made it seem as if stocks would never fall again, but we have heard smaller investors say this before as well.

Unfortunately, the gains in 2013 were also fabricated by the infusion of capital by the Federal Reserve, so smaller investors who felt as if Twitter could do no wrong because the market could do no wrong missed the mark on at least two separate occasions.  Twitter was being fabricated by institutions that were chasing performance in the stock market, and the stock market itself was being fabricated by constant infusions of capital by the FOMC.

Everything considered, Twitter has already fallen aggressively, and I became concerned today when I heard an analyst on CNBC suggest that investors should short Twitter.  That is simply not true anymore.   The stock was a short when it was near $70, but at these levels investors should cover that position.  The gain is an excess of 40%, and it was something that was achievable as a direct result of paying attention.

In markets where smaller investors no longer pay attention to risk, significant opportunities exist for people who actually do.  We will continue to do what we always do and look for anomalies like this. 

Our recommendation for people who followed our advice on shorting Twitter near $70 is to take profits.  Cover the position, secure the gains, and buy yourself a fantastic lunch.  Our Real Time Trading report for Twitter is not flashing short signals like it was late last year.

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