WHAT IS "SHORTING"
In trading terminology, investors are "Long" when they buy and own a stock; and they are "Short" when they "borrow" stock from their brokerage firm to sell and at some point they need to buy this stock and give it back to the brokerage firm (i.e., since they owe it, they are "short"). In actual practice now, shorting is just as easy as buying, as we now have "inverse funds" (see definition below). This bacically makes shorting just like buying, and in fact, that is exactly what it really is.
In effect, with a long position, investors make money when the stock goes up and lose money when it goes down. With a short position, the opposite is true. So, in effect, when you "go long" you are betting that the market will go up, and when you "short" you are betting that the market will go down. All brokerage firms allow individual investors to buy or short, but "shorting" has a few restrictions. Before shorting, one should understand all of the "rules". Click here to see what to do on each new Signal"
Inverse Funds and Shorting
To make "shorting" easier, we now have "inverse funds" for all indices. Inverse fund are basically "short" funds, so when you want to "go short", instead of actually shorting, you simply buy the inverse fund. For example, to "go long" the S&P500 Index one would buy the ETF SPY; and to "go short" the S&P500 index one could simply buy the "inverse ETF fund" SH. http://www.investopedia.com/terms/i/inverse-etf.asp
Hedging
Instead of shorting all positions, investors with portfolios composed of large-cap US stocks may simply short an equivalent dollar amount of SPY (or buy SH), in order to "hedge" the portfolio against big drops. For example, the "short" position will go in the opposite direction of the large-cap portfolio, which should lead to "dampening" losses in large market drops.
Long-Only (no shorting)
We certainly understand that some risk averse investors might not want to be "short' in their portfolios. No problem, these investors should simply use their chosen MIPS model with a Long-Only strategy (Long or Cash positions only). That is, they simply sell and hold a 100% cash position in Cash on Short Signals from MIPS. The bottom line is that you decide on your strategy and there is no right or wrong.
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