Short Interest (Again) Precludes Correction

Friday, April 20, 2007 | 07:19 AM

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 . . .   


Bearish Bets Hit a Record On the NYSE
Lackluster Returns Fail to Discourage; Positions Rise 4.6%
WSJ, April 20, 2007; Page B6

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Tracked on Apr 20, 2007 8:18:48 AM


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

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