Tuesday, October 20, 2009

Short Interest Declines Again (and Why it Matters)

This B.I.G. link is a week old but I dug it out of the link-vault to re-iterate a point. From our Oct. 2 post "Dow Jones on a Knife Edge":
My best guesstimate is that the downtrend over the last few weeks is a shakeout fakeout. The declines in short interest last month* means there is less buying power from short-covering, which would mean faster and deeper down-moves. These scary down-moves should set up a final run up, with fear of loss reverting to the fear of not participating that we saw in August and mid September....
As we saw* in the 2008 oil market, a relentless up-move crushes the bears, both financially and psychologically. If you don't have that potential buying power, the down moves are fast and furious. From here it is not hard to see a 200 point down day in the DJIA come out of the robo-traders at any time, for any reason.
Here's the story from Bespoke Investment Group:

Last Friday, short interest figures for the end of September were released, and once again they showed declines. The average short interest as a percentage of float for companies in the S&P 1500 was 6.4%. This is now lower than any other point since at least the start of 2007. As shown in the chart, bets against the market have declined considerably since their peaks in 2008.

Short Interest 101309

As if shorting into one of the strongest rallies ever hasn't been hard enough...MORE
*From our June 2 post "Markets: What Happened to the Bears?":
We are coming up on the anniversary of an event in the oil market that may bear [so to speak -ed] some resemblance to what has been happening in the equity markets.
On June 6, 2008 oil staged it's largest dollar gain in history....

...After talking to some folks who had been mauled [cute -ed] I decided that the short-sellers had just given up. It is no fun to be selling into the buying of Goldman and their long-only index clients, CalPERS, the universiy endowments et al.
So they said to hell with it. Oil continued to rise for another 33 days before peaking on July 9.
On July 29 I had this comment at Environmental Capital:
Mike @ 4:13,
Two separate thoughts in that first post.
As best as I’ve can tell approx. 40% of the move from $80 to $147 (25-28 bucks) came from “speculation”. I use quote marks because of the terminology problems most of the talking heads have when the subject is commodities. Speculators in commodity parlance take the other side of a hedgers trade, thus performing a societal good.
The problem was, until last week, the shorts had been beaten up so bad by the relentless flow of “investor” money that were out of the game. The $10.75 uptick on June 6 was their capitulation.
They covered and said screw it....