A:  It is always a good time for short trades.  We don’t consider a market – or parts of the market – to be good or bad.  There are uptrends and downtrends.  A down market is not bad if you know how to short or use other bear strategies.  With the current market weakness, we are certainly finding more short sale opportunities so consider adding this strategy if you’ve never used it before.

Q: What does P/E mean? How is it calculated and how can I use it to make decisions when buying stocks?    – Aprajita J.

A:  P/E is a fundamental measure that stands for Price to Earnings.  It is a ratio of the current stock price to the stock’s earnings.  P/E is best used as a comparative measure rather than an absolute measure.  Different industries have different levels of “high” or “low” P/E’s.  Most investors use P/E as one of the fundamental considerations while most short-term traders tend to ignore it.  A basic approach considers a low P/E relative to industry peers as a bullish signal.

Q: What is a good way to practice without risking my cash? – Tim L.

A:  The old method of paper trading is still a good start.  You could literally paper trade which means you follow the market and write down your buys and sells in a notebook and evaluate your results.  Some programs allow for simulator trading – it looks like the real thing until you shut down.  Then you get to start fresh the next time.  But there is no substitute for having real money in the market.  So consider real trading but with very small positions -  1 option contract or 50 shares.  Then you get the real trades with all of the emotional attachment but less capital at risk.

Q:  My question is what happens when you are shorting a stock (aka Countrywide or Bear Stearns) and that stock goes to $0.  I wasn’t in the position when in went to zero but had been prior.  Would that be a good thing, or would you lose your money?  I would guess that your goal for any stock is to go to $0, theoretically.

A:  First of all, good trade!  We often discuss short selling in The Equity Oracle.  In a short sale, your maximum profit is when the stock goes to $0.  Think about what happens – you sell the stock short and collect the sales proceeds.  You are then obligated to buy the stock back to cover your short sale.  The less you can pay to buy the stock back, the better.  In actual practice, a stock won’t just drop to zero.  More often, it will languish in the penny stock range – perhaps a nickel or so – for months.  At that point, you have very little upside left so it would be best to cover your short for pennies on the dollar and find your next great trade!