WHY CHAOS IN EGYPT DOESN'T MEAN CHAOS IN THE US STOCK MARKET

Wait a minute. The stock market is actually UP on Monday 1/31/2011 after we all watched a weekend of wall to wall coverage of the crisis in Egypt. How can the market be going up when there is obviously so much uncertainty and danger in that part of the world?

I have to admit I thought the stock market would be down big today as there is one thing investors hate: uncertainty.

There is so much uncertainty about Egypt right now that no one knows what is going to happen, knows what could happen, or knows what to do about it. We have hardly heard a peep out of President Obama as he doesn't know what side to back or what to say either so he is just waiting and watching like the rest of us. (well maybe he is doing a little more than that)

There are questions about the Suez Canal and whether it will be able to stay open and let ships through. If not, that would impact business worldwide. There are questions about what type of government would take the place of the current pro US regime there now if it falls. There are deep implications regarding any new Egyptian government and Israel and that also will affect the whole world. It could all eventually lead to another war between who knows how many countries.

Why isn't the US stock market going lower today? The biggest reason is probably because people have gotten over the shock of the news over the weekend. If there was any panic here in the US it would have been on Saturday and the markets were closed that day. So now, people have had a chance to digest everything and they might not feel it will have quite as big an impact on us as they might have thought on Friday or Saturday.

Investors might also see the news that Mubarak has formed a new cabinet and is working to stay in power and get things under control. This would have a calming effect on investors as they are less likely to panic and sell based on improving news. As long as Mubarak stays in power, the market will likely not nosedive.

There is also a good economic news story or two out today such as this one about consumer spending having gone up in December for the sixth straight month. Any good economic news will help stabilize the market and there are more economic numbers out later in the week for jobs, automobile sales, factory orders, and construction spending. These numbers could have a big effect on which way the market goes along with developments in Egypt of course.

One of the things that is made clear today is that the direction the stock market moves, either up or down, is very much determined by the way people FEEL about things. Today was a classic day where the market COULD have opened down 200 to 500 points based solely on what is happening in Egypt. However, because investors don't apparently think the situation is quite as bad as I thought they would, the market opened up and remains up at midday.

STEPS TO SHORT A STOCK

This last weekend I decided I wanted to short a stock. It is something that I normally don't do and in fact the last time I shorted anything was over 10 years ago. But I saw a stock that I thought was too high that had been going steadily up for some time now and I thought it might have a pullback sometime soon.

The stock market as a whole has also been going up now for a while and I think a correction could possibly be around the corner (my opinion). So those two factors along with a few more reasons made me want to short the stock and I decided to do that on Monday.

I have an E*Trade account with plenty of cash in it but I wasn't sure they would let me short a stock and when I tried the system wouldn't let me. It turns out you need to have a margin account which I didn't have so in order to short anything, I would have to apply for a new margin account or upgrade my existing account.

I clicked the button to upgrade my account and was led to another page I had to fill out. The information they wanted included things like net worth, yearly income, and other things like that I didn't really want to divulge. In addition to that I had to agree to their terms and conditions for a margin account and wow, that was a LONG and complicated page of legalese.

When you short a stock you are borrowing money from the broker and that is the main reason why you have to agree to all sorts of things that might make you uncomfortable. The main thing you need to understand is that they can force you to get out of the position if you start losing money and don't have enough cash to back it up. The broker can sell your other stocks at any time and they can cover your short at their discretion because they don't want to lose money.

The best way to avoid anything like that from happening is to have more than enough cash in your account to cover any losses you might have if your short stock starts going up. In my case I will cover my short way before I lose more than I have in cash so I should be alright.

Once I applied for the upgrade to the margin account I was able to short the stock right away even before being approved. This might be because I have a long history with E*Trade and so it might not happen that way for you. A couple days later I also go the notification that my margin account upgrade was approved.

Who can open a margin account and what the requirements are I don't know exactly. Suffice it to say that the more money you have in your account and the longer you have been with your broker will undoubtedly increase your chances of getting one.

So, now I am in the strange position everyday that all people who short stocks are in that I want the market to go up so all my long positions will make money but I want my one particular short stock to go down. It is a funny feeling and can give you mixed emotions betting against a stock and it is definitely not something I will do much of. I also don't suggest shorting stocks for a beginner because there is just too much risk for beginners to really understand and they should be learning how to pick winning stocks anyway.