Short Interest (Again) Precludes Correction
No wonder China's 4.5% correction had so little impact here: There are a record number of bearish bets made on the NYSE.
We had mentioned back in October that the then record-setting short interest on the Nasdaq was precluding a major correction from occurring.
Today, we see a similar record setting short selling having the same impact -- only this time, it is on the NYSE instead. From this morning's WSJ:
"Short-selling activity jumped to another record on the New York Stock Exchange despite the tepid returns that such bearish bets have garnered so far this year.
For the monthly period ended April 13, the number of short-selling positions not yet closed out at the New York Stock Exchange -- so-called short interest -- leapt 4.6% to 10,989,496,813 shares from 10,510,404,017 shares in mid-March.
Market-wide, the short ratio, or number of days' average volume represented by the outstanding short positions at the exchange, fell to 6.1 from 6.2."
Despite a myriad of potential pitfalls facing the market, as we have noted in the past, overly large short selling creates a bid beneath the market. When grateful shorts cover, they prevent any downside momentum from developing.
If part of your thesis is investing due to "variant perception" -- the belief that you have figured out something the rest of the investment community hasn't -- then statistically speaking, the short side isn't really the ideal place to be when short interest is at record highs.
At that point, shorting is more akin to consensus investing, going along with crowd. Even if you do so independently . . .
>
Source:
Bearish Bets Hit a Record On the NYSE
Lackluster Returns Fail to Discourage; Positions Rise 4.6%
PETER A. MCKAY
WSJ, April 20, 2007; Page B6
http://online.wsj.com/article/SB117704497204276722.html
Friday, April 20, 2007 | 07:19 AM | Permalink
| Comments (46)
| TrackBack (1)
add to de.li.cious | 
digg this! | 
add to technorati | 
email this post
TrackBack
TrackBack URL for this entry:
http://www.typepad.com/services/trackback/6a00d8341c52a953ef00d8345376a769e2
Listed below are links to weblogs that reference Short Interest (Again) Precludes Correction:
» Opening Bell: 4.20.07 from DealBreaker.com
Nacchio convicted on 19 of 42 counts (BusinessWeek) Just in case you missed it, yesterday evening jurors in the Joe Nacchio case came back with a guilty verdict on 19 of the 42 counts. That's slightly less than half, but... [Read More]
Tracked on Apr 20, 2007 8:18:48 AM
Comments
Re the data, and this is coming from a memory shot through with holes right at the moment, but I'm thinking there was large short interest prior to one of the major bear markets--my guess is that it was 1929. If I'm right in that, then there's the experiential diss of the theory. With regard to the logic, if it's short covering that's holding the market up, then what you're telling me is that the shorts, having been ground to death in a bet that the market is overvalued and will fall, cover on a 30-40 basis point move. Sorry--unless we're dealing with the dumbest group of shorts on record, that makes no sense. Is it possible that some longs are hedging their long positions with puts, and that when they feel the panic lifting, they sell the puts, creating some buying? Yeah. But not at the level we've seen recently. There's certainly a bid under the market, but I just don't see it resulting from all the negativity about the market. In point of fact, I don't see all that much negativity about the market, and the mysterious manner in which the market lifts whenever it seems on the brink of falling does nothing to reinforce what little negatvity remains. Go to a bearish site like Fleckenstein's, and read the readers' comments, and there's tons of capitulation and self-doubt.
Posted by: Scott | Apr 20, 2007 8:00:25 AM
Who exactly is so massively short, the big ("smart") money or the little ("dumb") money?
Posted by: John | Apr 20, 2007 8:00:56 AM
Thanks Scott --
And I haven't forgotten about expiry today either . . .
Posted by: Barry Ritholtz | Apr 20, 2007 8:01:23 AM
The dumb money is short, while the COT (professionals) are now much longer. The most popular blogs post so much bearish spin, conspiracy theories, and negativity (about everything) -- so who can blame them.
The short side always "sounds" so much more cerebral. ;o))
Posted by: Frankie | Apr 20, 2007 8:12:03 AM
When looking at the last numbers on CAC, market has been down slightly for two consecutive days on HIGH VOLUME 6/7 Billion euros which are volume of "distribution days" in April may last year, but the indices do not move so much at the closing, the market was going up with an average of 3 Billion euros a day.
This is quantitative.
Posted by: Philippe | Apr 20, 2007 8:47:06 AM
If part of your thesis is investing due to "variant perception" -- the belief that you have figured out something the rest of the investment community hasn't -- then statistically speaking, the short side isn't really the ideal place to be when short interest is at record highs.
That depends on what you short. I don't hear anybody who shorted NEW, for example, griping about lack of returns...
Posted by: super-anon | Apr 20, 2007 9:00:25 AM
The indexes are red hot and have been for over three years running. Total fed credit feeding this market daily. M3 is exploding. Why is the Fed flooding the world with dough? Ben is afraid that housing will damp the economy. Not on his watch he says. If greenspan could get out of any jam by expanding the money supply then Ben will do it too. Greenspan thought we were going into deflationary spiral(remember that?), so he flooded the world with dollars. Massage the inflation rate down with hedonic substituion and noone will know the difference. Has anyone noticed the price of eggs lately? But its not infaltionary because people are substituting beef(but isn't beef going up too?)and the eggs are better because the chickins are getting more sunlight and eating better diets of soy instead of corn. hmmmmm. go figure.
the take away...don't fight the fed. Enjoy the expansion, but be ready to flip on a dime when the time comes. (hopefully though it wont come overnight in asia with no opportunity to exit. And stay away from one sided bearish blogs. the shorts may be correct ultimately, but by that time they will have nothing left to take advantage of the collapse.
now, go and enjoy the day.
Posted by: bigJIMMY | Apr 20, 2007 9:01:15 AM
The party doesn't end until the consumer gets pinched enough by the quickly rising cost of living.
What republicans can't bear to concede is that they need the peons to survive, and when you depend on the bees for honey...you damn well better make sure that the bees are healthy.
Posted by: KP | Apr 20, 2007 9:28:36 AM
Goes to show that macroeconomics don't matter....until they matter.
Posted by: Winston Munn | Apr 20, 2007 9:30:18 AM
On sentimentrader.com, I see that the Short Interest Ratio for the NYSE (de-trended) is back to the (ubber bullish) levels of the Fall 2002. Draw your own conclusions. These readings (what people are DOING) as opposed to BS surveys are much more significant to me.
A weekly breakout of the NDX (if it can do it today) will scare the shite out of this crowded trade.
Posted by: Fred | Apr 20, 2007 9:33:26 AM
One has to remember that there has been record growth in long-short hedge fund strategies when looking at this data. Also many hedge funds that may not claim to be long -short do short the ETF's that closely match their holdings to hedge some of their gains, especially those in the short cap sector. Another contibutor to short interest are the market makers on the exchanges that sell the puts to customers/hedge funds, etc - they too must short stock to hedge along with buying the calls to arb or manufacture those put sells. The data shows record levels of options/puts trading that continues to grow and will continue to add to these short interest numbers. This all adds to the short interest and does not point to a future level of short covering to push the market higher. It does reveal one of the many reasons why the market has not had what you might call a decent selloff in quite awhile. These positions (long -short) act like long gamma in options, providing buyers on dips and sellers on rallies. If you add the companies that are buying their own stocks in buybacks at record levels then there is always a bid under the market.
Posted by: Harley Evans | Apr 20, 2007 9:33:36 AM
Thank God for the bears, we on the long side of the market could not make it without you....
Without uber bearish sites like this and the invaluable Noureil Roubini, this market would have rolled over long ago.
Posted by: daisycolorado | Apr 20, 2007 9:39:44 AM
Barry,
Your post made me go back and re-read your post on variant perception. It was even better the second time around. Very good, big picture, non-technical look at trading psycology and strategy.
Thanks
PS - I think there is a bad link to that VP post in your post above.
~~~
BR Fixed it (Thanks!)
Posted by: REW | Apr 20, 2007 9:45:59 AM
Another day....another record high.
too bad the dollar is almost at a 15 year low, it is at a two year low vs. euro.
But keep that market up,up,up.
I agree with Barry....options expiry is just yet another excuse for the juicing to continue.
perma-bulls: please provide an arguement as to why the market should be at an all time high........every day. Good luck finding anything other than commentary.
Ciao
MS
Posted by: michael schumacher | Apr 20, 2007 9:47:45 AM
Keep bashing our country and our currency Micheal...please!
Posted by: Fred | Apr 20, 2007 10:01:55 AM
You have to understand the dynamics of long/short hedge funds. I have many friends who are in their souls long only managers, but in order to charge hedge fund fees, they have to "hedge". True story, a friend of mine is marketing his fund to investors, and someone asks, well how do you hedge? He says, by buying stocks cheap enough that I don't have risk of permanent capital loss. That investor passed. Next time my friend was asked the question he replied, "with tactical shorts of indexes against our long positions". That investor gave him millions. You have many many hedge funds that are blindly shorting indexes or supposed "gimme shorts" so that when they report to investors they can say "I'm 150% long, 75% short, and net 75% exposed".
As to shorting NEW, which a commenter mentioned above, unless you shorted it in the last few months, it was one hell of a painful ride. It cost neg 20 to borrow, was paying a 20%+ dividend and any gains you make are taxed short term. If you held the position for one year, you made less than 30% even though the stock went basically to 0.
Posted by: madlibs | Apr 20, 2007 10:02:13 AM
BR et al,
Anyone see the Bridgewater note and chart showing hedge fund leverage at highest level since LTCM?
AllAboutAlpha has a post on it, including some perspective about that level. Level is high because assets are so high. Leverage ratio is about 200%, back to where is was for most of the 1990s.
http://tinyurl.com/2aunlm
Posted by: REW | Apr 20, 2007 10:04:34 AM
Add to the "hand made" collars and butterflies all the structured products, which are using derivatives and confusion may arise when trying to differentiate naked put and naked long.
What is not confusing is the difference between unrealised profits and profits.
Posted by: Philippe | Apr 20, 2007 10:13:45 AM
Fred-
kindly fuck off as I've never bashed our country or currency.
Ciao
MS
Posted by: michael schumacher | Apr 20, 2007 10:24:07 AM
Just wondering aloud whether the short-ETF offerings, like SDS, QID, TWM, etc. are changing the nature of "short interest".
Posted by: Eric | Apr 20, 2007 10:25:49 AM
ms
you seem to have alot of anger where you shouldn't. i think you should talk to someone about this.
Posted by: fat mary | Apr 20, 2007 10:34:05 AM
If by making a factual statement about where the dollar is relative to historical data points is "bashing our currency" then I feel so very sorry for you and your fake flag-waving.
Grow up...
Ciao
MS
Posted by: michael schumacher | Apr 20, 2007 10:34:51 AM
Eric -- you hit on something there. PM's used to use the Rydex Funds and the Rydex Ratio to determine short sentiment. It stopped being really effective, just as these inverse ETF's came around. These ETF's have become the "hedge of choice" as they're liquid and offer intra-day pricing for hedging. Just look at the volume since March to see where chips are being placed.
Posted by: Fred | Apr 20, 2007 10:46:31 AM
mommy it hurts. make it stop.
what's left for the rational investor?
Posted by: erik | Apr 20, 2007 10:47:16 AM
"what's left for the rational investor?"
Try buying quality stocks that are trading at a PEG of 1.
There are plenty to choose from!
Posted by: Fred | Apr 20, 2007 10:52:58 AM
