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Increase in short selling



October 10, 2011 – Comments (2)

Excellent post by Mark at Fund My Mutual Fund regarding the recent spike in short selling in September.

This goes along with the theme of my recent posts, that we have not seen the 'top' of this cyclical bull market yet and that if we crash here, it will be the most widely telegraphed crash ever because nearly everyone is prepared for it:

-- Oct 4
-- Yet another reason why I don't think we saw 'the' top
-- Yet another reason why I don't think this cyclical bull is over
-- Update on Long Term Projection


Monday, October 10, 2011
Short Selling Rises Most Since 2006 in September - Just Ahead of Rip Roaring Rally of October
Posted by Mark at 12:08 PM

It almost never fails does it?  Just as investors position themselves for zig.... instead zag happens.  Apparently we just saw the largest increase of short selling since 2006 in September - which worked out nicely for about 1.75 days in October, before this face ripping rally of 10%.  One can be sure part of this move upward is those newly placed shorts covering - indeed we saw such a vicious move last Tuesday in the closing 45 minutes, I have to assume many of those positions were harpooned that day.

    * Investors are increasing bearish trades around the world by the most in at least five years, convinced the lowest valuations since 2009 will prove no barrier to losses after $11 trillion was erased from equities.  Borrowed shares, an indication of short selling, climbed to 11.6 percent of stock last month from 9.5 percent in July, the biggest increase since at least 2006..
    * Trades that profit when Chinese equities decline have reached a four-year high and bearish bets in the U.S. are the most since 2009, exchange data show.
    * Slowing economies are spurring short sellers after indexes in 37 out of 45 major countries tumbled 20 percent, the common definition of a bear market.
    * “The Lehman collapse is way too clear in people’s minds,” said Henrik Drusebjerg, who helps oversee $230 billion as senior strategist at Nordea Bank AB in Copenhagen. “They don’t want to get burned as much again. They know either they get some protection or get out altogether.”
    * About 4.1 percent of NYSE shares have been borrowed and sold, up from 3.5 percent at the end of July, data from the bourse shows. U.S. short sales are rising at the second-fastest pace on record after the 2008 financial crisis, according to exchange data dating back to 1995.
    * Short selling, where traders borrow shares and sell them, hoping for a decline, is increasing even as equities approach the cheapest valuations on record. The MSCI All-Country World trades at 11.8 times reported profit, compared with 11.9 in the five months after Lehman’s collapse. The measure’s average price-earnings ratio since 1995 is 21, data tracked by Bloomberg show.
    * The bond market indicator that has predicted every U.S. recession since 1970 now shows that the economy has a 60 percent chance of contracting within 12 months. The so-called Treasury yield curve, adjusted for distortions caused by the Fed’s record low zero to 0.25 percent target interest rate for overnight loans between banks, shows that two-year notes yield 20 basis points, or 0.20 percentage point, less than five-year notes, according to Bank of America Corp. research.

And the last time this happened?

    * Bearish bets last increased faster in March 2009, the same month the S&P 500 began a bull market that doubled its value.

2 Comments – Post Your Own

#1) On October 10, 2011 at 3:04 PM, davejh23 (< 20) wrote:

"...if we crash here, it will be the most widely telegraphed crash ever because nearly everyone is prepared for it"

It seems that there is no real defined contrarian play here.  Short interest recently spiked, but leverage useage was near all time highs and mutual fund cash levels at all time lows just a couple months ago...that was after we had already seen most of the declines.  One week the media is extremely pessimistic (recession guaranteed, earning disappointments expected, etc...), the next week (today) there's nothing but optimism (no chance of recession, earnings season enthusiasm, etc...).  How do you swing from one extreme to another on mildly encouraging news out of Europe, a weak jobs report, and a GDP upgrade from Goldman?  Based on the Goldman upgrade, I'd bet on the opposite...Q3 earning misses, near 0% GDP growth, and much further downside for stocks...Goldman will make a killing on the short side...after more volatility shakes out most of the rest of the shorts.

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#2) On October 10, 2011 at 5:05 PM, memoandstitch (< 20) wrote:

The market bounced because people just realized Greece won't default in October.  That doesn't mean we won't be back at it again when Greece finally defaults.

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