Tuesday, May 29, 2007

NYSE Short Sales Nearing Record

From Bloomberg:

Short sellers are betting against U.S. stocks like never before as the Standard & Poor's 500 Index approaches an all-time high. That's making some of the biggest bulls even more optimistic.

``What the short seller appears to be doing is doubling down,'' said Kenneth Fisher, who oversees about $40 billion as chairman of Fisher Investments in Woodside, California. ``You love to see it, because if you believe there is a basic driver to the bull market, they're going to get run over.''

The amount of shorting -- where traders sell borrowed stocks expecting to buy them back after prices fall -- jumped to 3.1 percent of the total shares listed on the New York Stock Exchange this month. That's the highest since at least 1931, according to Bespoke Investment Group LLC, a research firm in Mamaroneck, New York.

When there are a lot of shorts in a market it actually adds upward price pressure. As markets rise, shorts are forced to cover their positions, which sends shares higher.

I should add that 1931 was a really bad year for the market. I have an old chart of the Axe-Houghton Industrial Stock Price Average from the book Profits in the Stock Market by Gartley. The index dropped from about 180 to 100. However, the US was right at the beginning of the depression then.