Short Selling Explained — How Professionals Profit From Cycle Peaks

What Is Short Selling?

Short selling is the practice of borrowing a stock from another investor (via your broker), selling it at the current market price, and hoping to buy it back later at a lower price — returning the borrowed shares and keeping the difference as profit.

Example: You borrow 1,000 MPCC shares at NOK 31 and sell them, receiving NOK 31,000. Three months later, MPCC has fallen to NOK 18. You buy 1,000 shares at NOK 18 (spending NOK 18,000), return them to the lender, and keep the NOK 13,000 difference (minus borrowing costs and commissions).

The Asymmetric Risk of Short Selling

Short selling has a fundamentally different risk profile from buying stocks (going long):

• Going long: Maximum loss is 100% (the stock goes to zero). Maximum gain is unlimited (the stock keeps rising).
• Going short: Maximum gain is 100% (the stock goes to zero). Maximum loss is theoretically unlimited (the stock keeps rising).

This asymmetry is the core challenge of short selling. A long position in a stock that goes against you loses value gradually. A short position in a stock that goes against you can lose money at an accelerating rate — particularly in cyclical stocks during euphoric rallies near cycle peaks.

The Short Squeeze Risk

When a heavily shorted stock begins to rise, short sellers may be forced to buy the stock to limit their losses — creating additional buying pressure that accelerates the rise. This self-reinforcing dynamic is called a short squeeze, and it can cause violent, rapid price increases in stocks with high short interest.

Cyclical stocks at apparent cycle peaks are often heavily shorted — creating significant short squeeze risk if a positive surprise (geopolitical event, better-than-expected demand data) temporarily reverses the decline. This is one reason why short positions in cyclical stocks require tight stop-loss discipline.

Practical Short Selling for Retail Investors

Direct short selling requires a margin account and the availability of stock to borrow — which is not always available for smaller, less liquid Oslo Børs stocks. Practical alternatives for retail investors who want to express a negative view include:

• Selling existing long positions: The simplest approach — if you are long a cyclical stock approaching its peak and cycle indicators are flashing sell, reducing or exiting the position captures most of the benefit of a short without the unlimited loss risk
• Inverse ETFs: Some providers offer inverse ETFs on energy or commodities indices — though these are not available for Norwegian-specific sectors
• Put options: Available on some Oslo Børs stocks and major ETFs — provides downside exposure with defined maximum loss (the premium paid)

The Signycle Perspective

Signycle's sell signals are primarily designed to help investors exit long positions near cycle peaks — not to initiate short positions. For most retail investors, capturing the long side of cyclical cycles (buying at troughs, holding through recovery) is more than sufficient to generate excellent returns without the additional complexity and risk of short selling.

If you are considering short selling, start by paper-trading (tracking hypothetical short positions without real money) through at least one full cycle before committing capital. The psychological challenge of holding a short position through a temporary rally is significantly harder than holding a long position through a temporary decline.