Heinz...was that from ContraryInvestor?
Les posted that link a few days ago I think... I wonder what it will take for the market to breakout, either one way or another?
Shorting Out...It just may be a bit different this time. Over the last 10 years, public participants in the stock market have been taught that stocks always recover. Greenspan has surely more than done his part in supporting that thesis. The concept of moral hazard has clearly been embraced by the professional investment community. How else could you explain cash levels in equity mutual funds at record lows or the astronomical use of leverage and derivatives in "modern day" investing?
As you know, short interest in a stock or an index is a real indicator of broader sentiment toward that stock or index. Being the contrarians that we are, very high levels of short interest are often an indicator that a lot of bad news and fear is impounded in the price of the security or index being measured. Conversely, low short interest ratios indicate complacency and direct lack of fear. With this in mind, we thought it might be time to take a look at what short interest on the NASDAQ is currently saying about confidence. With the crushing blows many of the NASDAQ superstars have taken over the past few months, one would naturally expect a relatively high level of anxiety. Right? Well, not quite. Have a look:
NASDAQ
Short Interest Ratio At Market Low
Bear Market Low 1990
2.9%
Bear Market Low 1994
3.2
July 1996 correction
3.1
April 1997 correction
3.0
October 1997 correction
2.8
October 1998 correction
2.8
NOW
1.5
The current short interest ratio does not indicate fear at all. It is much lower than at any of the previous NASDAQ market lows of the past 10 years. We keep hearing the bulls pointing to oversold indicators as points of comfort in assessing the potential depths of the current downturn. From our perspective, overbought readings have meant nothing for years on the upside. Shouldn't oversold readings mean nothing if we are truly on the brink of a secular bear market? The shorts have been driven from the NASDAQ. The close to 100% move in the NASDAQ from October of 1999 to the top this year clearly forced the shorts to evacuate in the upward tempest. The short interest ratio indicates confidence, complacency, and belief in the NASDAQ stalwarts. For what it is worth, the quantitatively oriented folks at Ned Davis Research have calculated that since 1990, a short interest ratio for the NASDAQ at a level below 1.7% has historically produced a subsequent negative level of annualized NASDAQ return.
Lastly, in years gone by, the short community has been a source of demand for stocks in falling markets. Covering shorts at lower levels was not only every short seller's dream, but also clearly provided demand support to stock prices. Given that the short community has been decimated over this decade, it just may be different this time.
Would all the new issues flooding the market now from lockups and in the past from IPO's have any influence on this short situation? I wonder...
contraryinvestor.com
Regards,
John M. |
