Record Short Interest Prevents Correction

If you are at all curious as to why the market keeps powering higher, you can look at several factors: Falling energy prices, lowered interest rates, increased futures buying are likely culprits we have identified as impacting intermediate term trading.

But don’t overlook THE key short term driver for why the market has a "preternatural bid" beneath it:  Record Shortselling.

According to today’s WSJ, "Short-selling activity rose to a new record on the technology-stock-heavy Nasdaq Stock Market, outpacing the rise in bearish bets in other parts of the market."

"For the monthly period ended Oct. 13, the number of short-selling positions not yet closed out at Nasdaq — so-called short interest — rose 0.8% to 7,414,701,519 shares from 7,353,774,333 shares in mid-September.

The rise outpaced the 0.1% increase in short interest at the neighboring New York Stock Exchange, which as previously reported also saw its total short interest hit a record in the October period.

Despite a market run-up that has pushed the Dow Jones Industrial Average to records this month, many short-sellers have hung onto their bets, which lose value during such upturns…

The Nasdaq short ratio, or number of days’ average volume represented
by the outstanding short positions at the exchange, fell to 3.9 from
4.4 last month."

The record short selling manifests itself in several ways in actual trading.

From a Sentiment perspective, it means that we have not achieved a giddy excess bullishness required for a correction. 

And, as long as short positions are at all time records, its hard for any correction to develop. Any downside momentum is simply halted by covering. And exasperating things, each move upwards becomes exaggerated as shorts stop losses get triggered and they buy in.

Of course, this can change in a hurry: words or deeds from the Fed, oil prices, geopolitics, even an errant comment from Treasury Secy can start a cascading chain reaction.   

Consider this: if the rabid anti-shorting Sith Lord crew get their way, they will have succeeded in removing a key floor to markets, and source of buying when we correct.

Despite my Macro-environment Bearishness, I have been telling clients that it is still too early to short, given the technical picture. Short interest only adds to that.


UPDATE: October 25, 2006 7:28am

For a timely example of how short interest can impact a stock, Marketwatch’s Bambi Francisco notes that:

Amazon (AMZN) shares shot up 11% in after-hours action, partly on relief the retailer didn’t blow its quarter, and to a great extent because those who sold Amazon short prior to the results had to run for cover. Amazon’s short interest stands at the highest level in at least a year. According to the Nasdaq, 43.6 million shares are held in a short position.

That’s a perfect example of how a crowded short position places a floor under a stock or market . . .


Bearish Bets On the Nasdaq Reach a Record
Increase Reflects Concerns Of Lingering Weakness
Despite Recent Stock Rally
WSJ, October 25, 2006; Page C11

Category: Markets, Psychology, Technical Analysis, Trading

Blog Spotlight: Global Economic Analysis

Another edition of our new series:  Blog Spotlight.

We put together a short list of excellent but somewhat overlooked
blog that deserves a greater audience. Expect to see a post from a
different featured blogger here every Tuesday and Thursday evening,
around 7pm.

Up next in our Blogger Spotlight:  Michael Shedlock and Mish’s Global Economic Trend Analysis. Mike is one of the editors of The Survival Report, covering stocks and the economy. He also writes for the Daily Reckoning, and co-edits Whiskey & Gunpowder. He also runs stock boards on the Motley Fool, Silicon Investor, and TheMarketTraders. He is an avid photographer, when not writing about stocks or the economy, with over 80 magazine and book covers to his credit.





Earnings,  Confidence, and Boxes

third-quarter profit rose 2
percent, less than analysts expected, as demand for home loans slumped. The
company’s shares surged higher on plans to lay off more than 2,500 employees
and buy back up to $2.5 billion of stock, and as higher profits in other units,
including Countrywide Bank, cushioned the mortgage decline.

It seems the street just can’t get enough bad news. CFC
rallied 5% as investors warmly welcomed news of more layoffs. CFC is already
talking about the 2008
. It’s never too early to do that. “By 2008, surviving players will be positioned for ‘one hell of a year’”
said CEO Angelo Mozilo.

Ford lost $5.8 billion, or $3.08 per share, during the 3rd
quarter this year. Sales fell 10% to $36.7 billion. Excluding special charges,
Ford posted a loss from continuing operations of $1.2 billion or 62 cents per
share. Last year during the same period, Ford posted a net loss of $284
million, or 15 cents per share. Ford has now lost $7.2 billion for the year. 3Q
output was down 11% vs. 17% drop in overall North American sales and a 25% drop
in F-series pickups. The company plans
4Q North American output cuts of 21%.

Ford called those results “clearly
. Shares of Ford are also up since the announcement. Yes those
results are “unacceptable” but what is Ford doing about it? Ford’s “Way
Forward” plan, calls for eliminating 44,000 hourly and salaried jobs, closing 16 factories and making other
changes by 2012. Part of the “Way Forward” is to Kill Taurus and
along with it a lot of jobs at US assembly plants.

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