Bob:
Again, thank you for the thoughtful explanation. Gives me something to think about.... It explains why markets seem to top when the greatest number of new issues are being introduced, and also suggests the importance of watching the short interest in the market since that becomes an important supply component. In January, the short interest in the market was down even though stocks were not really dropping significantly, signifying that supply was down. And the market began its current hyperbolic move. Short interest was up in both February and March increasing supply in both of those months but also signifying that much of the demand during those times were shorts covering to even more shorts. It also helps explain why there seems a time limit to these moves that seem to last somewhere in the neighborhood of 13 to 17 weeks before the supply is great enough to stop further upward movement in the market. As more money is coming into the market at a top, stocks are not moving upwards because the supply provided by the shorts is meeting the demand. Obviously this is not the only factor, but it does play a significant role. It is disappointing that short interest is only reported once a month as it is difficult to look at old numbers and have it be a good indicator. But I think I'll watch this closely and see if there is some positive correlation.
However, it is interesting to note that in both AOL and YHOO, when the short interest was reportedly down (lower supply) these stocks took off on the upside. In fact, both began their short squeezes on the day short interest was reported, AOL in Feb and YHOO in March. I haven't really checked out this phenomena on other stocks, but if this is something that holds true on most stocks, then it may be an indicator for a short to cover especially if the market (or a stock) doesn't seem to have a great deal of downward momentum at the time the short interest is announced.
In the case of YHOO now, we have seen the supply increase significantly due to insider selling and an increase in the latest figures of short selling. However it is unclear to how much of the short selling is related to the action in the options market which is a net wash in supply unless it is being done by insiders. The April call situation will trigger an imaginary drop in short interest and since I think the options expire on the same day that short interest is taken, I don't know whether or not this will show up in the April short interest or the May's. The open interest in deep in the money July options have been increasing dramatically in recent weeks so this again inflates the short interest for the count this month. Again this does not increase supply as these shares will not be covered (unless this is insider activity).
Which brings me to another question; at what point does an insider have to report sales of stock? For example, if Softbank is the seller of these deep in the money calls, are they required to report sales of stock at the time of sale of options or is it done when the shares are called? |
