The WSJ reports:
"Short-selling activity jumped to a record at the New York Stock Exchange during a reporting period in which U.S. stocks pulled back broadly amid fears of higher interest rates and weakness in overseas financial markets.
For the month ended June 15, the number of short-selling positions not closed out — known as short interest — rose 5.5% at the Big Board to 9,087,309,158 from 8,613,110,732 in mid-May.
Marketwide, the short ratio, or the number of shares that investors have sold short divided by average daily volume, fell to 4.9 from 5.0."
High short selling can be a contrary indicator, depending upon who does it. When its the general public, it is typically a good fear indicator. At extremes, its a buy signal. Rallies can often get started with short covering, and this can lead to fierce price spikes as shorts scramble to cover (like last Thursday’s 200 pointer).
However, short-selling by "smart money" — e.g., NYSE specialists, market makers, etc. — is often a sell signal. When too much of the public clamors fopr stocks regardless of price, the professional selling can often mark a top. These often come form the Commitment of Trader’s reports (more on the CoT soon).
The short selling reported last week is the total short position of the exchange — that sets the stage for a modest advance. As these shorts cover, its fuel for the market to grind higher.
UPDATE: June 22, 2006 4:57pm
Birinyi Associates notes the percentage of NYSE Short Sales of the smart money and the dumb money:
Short Shares as Percent of Total
Short Selling Surges to Record On the Big Board
Softness in Markets Abroad And Interest-Rate Concerns Drive Dimmer View of Stocks
PETER A. MCKAY
WSJ, June 22, 2006
I frequently discuss Microsoft, and for many many reasons: They are a tech bellwether, a huge part of the S&P and Nasdaq 100 (and a smaller part of the Dow). They have also been a thorn in the side of new technology development and innovation, but now that so much of it has moved to the web, its gotten away from them.
This is a good thing.
One of the commenters said some time ago that I was "irrational in my hatred for Microsoft." That’s hardly the case; Microsoft has put a lot of cash in my pocket, so at worst, I should be grateful to them for the windfall.
However, I am still an objective observer, and I believe that Mister Softee is not what most investors think it is: They are hardly innovators; rather, they copy other people’s work relentlessly, until by default they own the standard. Their products are kludgy, bloated and anti-instinctive; They are hardly the elegant, easy to use software first dreampt up by science fiction writers decades ago.
From an investing standpoint, their fastest growth days are behind
them, yet they are hardly a value stock — yet. (Cody and I have disagreed about this for some time). The leaders of the last bull Market are rarely the leaders of the next. Despite this, Wall Street still loves
them, with 28 of
are widely owned by active mutual fund managers and closet Indexers.
Many people think of them as this well run money machine; In reality, they are very poorly managed by a group of techno-nerds with very little in the way of management skills. Even their vaunted money making abilities are profoundly misunderstood: Its primarily their monopolies in Operating Systems (Windows) and Productivity Software (Office) that generates the vast majority of their revenue and profits. Their Server software and SQL Database make money, but hardly the big bucks of Windows or Office. MSN is a loser, MSNBC is a dud, their Windows CE is hardly a barn burner — even X-Box has cost them billions more than it is likely to generate in profits over the next 5 years.
Lest you think its just me who thinks this way, consider no less an authority than Robert X. Cringely. He is the author of the best-selling book Accidental Empires (How the Boys of Silicon Valley Make Their Millions, Battle Foreign Competition, and Still Can’t Get a Date). He has starred in several PBS specials, including Triumph of the Nerds: A history of the PC industry.
After Gates resignation, Cringely wrote this:
"Microsoft is in crisis, and crises sometimes demand bold action. The company is demoralized, and most assuredly HAS seen its best days in terms of market
dominance. In short, being Microsoft isn’t fun anymore, which probably means that being Bill Gates isn’t fun anymore, either. But that, alone, is not reason enough for Gates to leave. Whether he instigated the change or someone else did, Gates had no choice but to take this action to support the value of his own Microsoft shares.
Let me explain through an illustration. Here’s how Jeff Angus described Microsoft in an earlier age in his brilliant business book, Managing by Baseball:
"When I worked for a few years at Microsoft Corporation in the early ’80s, the company had no decision-making rules whatsoever. Almost none of its managers had management training, and few had even a shred of management aptitude. When it came to what looked like less important decisions, most just guessed. When it came to the more important ones, they typically tried to model their choices on powerful people above them in the hierarchy. Almost nothing operational was written down…The tragedy wasn’t that so many poor decisions got made — as a functional monopoly, Microsoft had the cash flow to insulate itself from the most severe consequences — but that no one cared to track and codify past failures as a way to help managers create guidelines of paths to follow and avoid."
Fine, you say, but that was Microsoft more than 20 years ago. How about today?
Nothing has changed except that the company is 10 times bigger, which means it is 10 times more screwed-up.