Listen to the Shorts

 | May 08, 2012 | 11:15 AM EDT
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It's time to praise the short sellers for what they do best.

They lend skepticism to the market. They warn. They give you a head's up even if it means keeping you out of stocks that are momentarily hot or have strong adherents that get too excited and lack discipline.

Today's action in this tumultuous market demonstrates the need to keep track of what short sellers have been saying. Let's tick down the list.

First, there's Fossil (FOSL). There's been no doubt that Fossil's been a rocket ship. It's been an amazing performer over the years. But shorts have repeatedly warned that Fossil's accessory business has always been faddish and would eventually run out of steam, not unlike Deckers (DECK), with its Uggs. Today we found out that Fossil has, indeed, hit a wall, even if it is a European wall. The shorts nailed it.

Second, there's Mako Surgical (MAKO), which has pioneered a robotic system for knee and hip surgery. Here's one that many bulls have tried to analogize to Intuitive Surgical (ISRG). Like Fossil, it's been red hot, but the bears have been wise to it. How do we know? Because almost a third of the float of what trades has been short. This morning, we learned that the string has run out with a huge revenue shortfall. The warnings from the shorts proved true.

Third, there's the curious case of Rackspace (RAX), which as a manager of data warehouses has been trading positively along with all the cloud plays like Equinix (EQIX), F5 (FFIV), Citrix (CTXS) and (CRM), all of which have turned in some stellar earnings. Herb Greenberg of CNBC has repeatedly warned that Raxspace will eventually be hurt by having to spend too much money on what will amount to a commodity business. Herb's no short seller. He can't trade stocks. But he sorts through a ton of inputs, including those of short sellers and Herb has filtered through the clutter and flagged these warnings. Today Raxspace basically confirmed those worries. It's been hammered.

These stories remind me of Green Mountain Coffee (GMCR), where short sellers very publicly warned of a slowdown, one that's occurred. Today we learned that the chairman of the company sold 5 million shares because of a margin call. He may have been a believer, but the shorts knew better as they often do.

Finally, shorts have repeatedly warned that Dendreon's (DNDN) Provenge, a breakthough prostate cancer treatment, would not be adopted with the alacrity that the incredibly bullish boosters claimed it would. Today the company said growth would be modest and it reported a loss that was larger than people expected.

Now short sellers can be wrong, as wrong as anyone who tries to predict the direction of a stock. They can be early as many of the stocks I have mentioned here were fabulous performers, not unlike Netflix (NFLX), Deckers and Research in Motion (RIMM) before their downfalls. They often target expensive stocks even when there's no flaw and they've been burned for that.   But their function is a good one and the skepticism they engender can make us all better investors.

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