specialists are boolish
December 21st, 2003 5:00pm ET
The Specialist Short Ratio plunged last week to its lowest reading since the
9/11 terrorist attacks, coming in at an ultra-low 24.1%. That means
specialists are currently holding less than one fourth of all outstanding
shorts, a clearly positive development from both an intermediate and long-term
perspective. On an intermediate-basis, whenever the Specialist ratio drops 5%
or more in a single week, the S&P has very good odds of making a higher weekly
close within three weeks, with 35 winners out of the past 41 signals over the
past decade (see full record.) Of course, this past's week reading was nearly
double that 5% threshold, making it even more likely we'll see a higher weekly
S&P close in short order. There have only been a dozen cases since 1990 in
which the Specialist Short Ratio fell 7% or more in a single week. In every
case, the S&P posted a higher weekly close within two weeks, and in 11 out of
12 cases it was the very next week...
S&P500 Performance after the Specialist Ratio falls 7%+
12/19/03 Spcl -8.9%... ???
05/23/03 Spcl -9.4%... Higher weekly close one week later
09/28/01 Spcl -22.8%... Higher weekly close one week later
11/24/00 Spcl -7.9%... Higher weekly close two weeks later
06/26/98 Spcl -17.1%... Higher weekly close one week later
01/23/98 Spcl -11.8%... Higher weekly close one week later
12/29/95 Spcl -11.3%... Higher weekly close one week later
07/22/94 Spcl -10.2%... Higher weekly close one week later
05/20/94 Spcl -7.1%... Higher weekly close one week later
04/22/94 Spcl -8.7%... Higher weekly close one week later
01/21/94 Spcl -7.0%... Higher weekly close one week later
05/28/93 Spcl -8.1%... Higher weekly close one week later
10/23/92 Spcl -7.0%... Higher weekly close one week later
From a longer-term perspective, a Specialist Short Ratio this low indicates
that the long-term bullish signal triggered by this indicator back in June of
2002 will remain in effect for quite possibly all of 2004. If you'll recall,
June of '02 was the first time the Specialist Ratio fell under 35% after
trading above 45%. When the Specialist Short Ratio falls below 35%, it's a
bullish sign for stocks because it means that the public is holding an
unusually high amount of open short positions. And since the public is usually
wrong in their opinion, there's a much better than average chance we'll see
the S&P500 trading higher by the time the Specialist Short Ratio rebounds into
more typical territory. Historically, whenever the SSR drops below 35%, it's
been a clear buy signal for the stock market on a longer-term basis. Long
positions are held until the SSR rises above 45%, signaling that open short
positions are moving from the uninformed public back into the hands of the
specialists (smart money). All occurrences of this signal since 1980 are
listed below. Note that there has never been a losing signal.
Long-term S&P Timing with the Specialist Short Ratio
06/21/02 Buy 989.13... OPEN
09/28/01 Buy 1040.84... 10/12/01 Sell 1091.65... +4.9%
08/26/94 Buy 473.80... 07/18/97 Sell 915.30... +93.2%
05/28/93 Buy 450.21... 01/07/94 Sell 469.90... +4.4%
05/29/92 Buy 415.35... 02/19/93 Sell 434.22... +4.5%
11/29/91 Buy 375.22... 01/10/92 Sell 415.10... +10.6%
05/04/90 Buy 338.39... 06/14/91 Sell 382.29... +13.0%
04/15/88 Buy 259.77... 05/19/89 Sell 321.24... +23.7%
10/23/87 Buy 248.22... 11/06/87 Sell 250.41... +0.9%
01/16/87 Buy 266.28... 02/06/87 Sell 280.04... +5.2%
10/17/86 Buy 238.84... 01/02/87 Sell 246.45... +3.2%
09/14/84 Buy 168.78... 03/07/86 Sell 225.57... +33.6%
09/09/83 Buy 166.92... 08/24/84 Sell 167.51... +0.4%
10/09/81 Buy 121.45... 09/17/82 Sell 122.55... +0.9%
Along similar lines, while specialists are holding a near-record low level of
shorts, the 'public' is holding a near-record high level of shorts. When the
public has loaded up on short positions in the past, it's typically preceded a
rally in stocks, reinforcing the fact that the public is invariably on the
wrong side of the market. For example, the Public Short Ratio (PSR), which is
simply all shorts held by the public divided by total outstanding shorts, is
currently running at a high 56%. In the table below, I've listed every
instance over the past decade in which the Public Short Ratio hit 55%,
followed by the performance of the S&P500 until the PSR fell back to 50% or
less. In other words, we want to see how the stock market performs when the
public turns overly bearish and holds more than half of all short positions.
As you can see, it's typically been a much better idea to fade the public when
they've turned this bearish in the past...
Dec 22nd excerpt:
... Turning to the long-term outlook for stocks, the latest short interest figures
across all exchanges were made available late last week, and it's worth noting
that total short interest fell to 7.26 billion shares, down from last month's
7.38 billion. This latest drop is particularly important because in the
process, total short interest has now violated its previous low of 7.34
billion, in effect making another series of 'lower lows'. Back in my August
6th commentary, I showed a long-term chart of short interest and noted that...
"it tends to climb regardless of the market environment, which leads to an
interesting question. How does the market perform when short interest isn't
rising? The answer is it tends to rally. In fact, "tends to" may not be strong
enough wording, as the S&P has actually rallied in each of the last fourteen
occurrences of slumping short interest." Since the last such buy signal
triggered by this indicator at the end of July, the S&P is up about 90 points,
or 9%, making the fifteenth straight signal that has correctly forecasted a
higher market six months down the road. That signal from last July will fall
off the board in late January, but now that short interest has made another
series of lower lows, a fresh six-month buy signal has been triggered as of
Friday's close. That suggests the S&P will be trading north of 1088 in mid-
June of 2004...
Total Short Interest makes Lower Lows
12/19/03 SPX 1088.66... ???
07/25/03 SPX 998.68... +9.0% (OPEN)
12/20/02 SPX 895.83... +11.2% six months later
11/20/98 SPX 1163.55... +14.3% six months later
01/19/96 SPX 611.82... +4.4% six months later
08/25/95 SPX 560.10... +17.7% six months later
02/25/94 SPX 466.06... +1.7% six months later
04/23/93 SPX 437.03... +6.0% six months later
03/20/92 SPX 411.30... +2.8% six months later
07/26/91 SPX 380.93... +9.1% six months later
03/22/91 SPX 367.48... +5.6% six months later
07/21/89 SPX 335.90... +1.0% six months later
01/22/88 SPX 246.50... +6.9% six months later
11/20/87 SPX 242.00... +4.6% six months later
10/25/85 SPX 187.52... +29.2% six months later
01/25/85 SPX 177.35... +8.5% six months later
*Courtesy Markettells.com, used with permission |
