You may have noticed that each Friday over the past couple of weeks we get a bit of strength in stock markets especially in the morning. I learned over many years never to buy stocks (or ETF’s) on Fridays because it’s usually the day that short-sellers close out the positions. Nobody wants to carry a high risk bet over a weekend.
“Short covering, also called “buying to cover”, refers to the purchase of securities by an investor to close a short position in the stock market. The process is closely related to short selling. In fact, short covering is part of short selling, which involves the risky practice of borrowing and selling stocks in the hope of buying them back at a lower price, thus generating profits.” (https://corporatefinanceinstitute.com/)
How does short-selling work? Imagine you thought the housing market was about to collapse – causing home prices to fall. You don’t own a house, so you arrange to sell your neighbor’s house to a third party. You sell it for cash, and tell the new owner he can move in 2 months later. Suddenly as you expected, housing prices plummet. The buyer no longer feels he can own the home (afraid home values will fall further; below his mortgage obligation). You offer to buy it back from him at a lower price and he agrees. Sounds absurd right? Well it is of course illegal (and has happened to the odd poor unsuspecting soul). Not in the stock market – it’s called naked short-selling. In my opinion it should be illegal in all markets.
