3DFX Message Board - Msg: 5706003

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Technology Stocks : 3DFX

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To: jttmab who wrote (7019)	9/9/1998 5:46:00 PM
From: Sun Tzu	Read Replies (1) of 16960

OT -- RE Effect of short positions Nice to hear from you James. The more I study the market, the more I find that cause-and-effect are very intertwined; is it the selling that forces the stock down, or the down trend that forces the selling? I've noticed that if I plot the short position and stock price on the same graph (for stocks that have a large short following over an extended period of time) they are almost mirror image of one another. Now there are two ways that you can interpret this. (a) Shorts sense that stock is poised to drop and as they sell the price drops until the shorts decide they have over done themselve. (b) The shorts are a contrary indicator. While the stock goes up they can't see the down potential and as it drops they pile on to it. so the greatest short position is achieved at the bottom. Recent studies suggest that a large short position indicates imminent price decline. This refutes the theory that a large short position is good for the stock because the shorts have to cover. My personal opinion is that it is a bit of both. Shorts are more trader oriented than longs. So as the stock is moving up, they don't fight the trend and stay clear. As a down trend establishes, they pile on and ride it down. But like most people they don't just follow the trend. They also look at the fundamentals and believe that the stock is overpriced. So by adding selling pressure, they simply speed up (and perhaps exagerate) the "inevitable". As the stock rebounds from the lows, they take profits and close their positions. You are right that shorts add to the volatility. This stems from their short term trader disposition. Interpreting the short position is not different from interpreting the long position. Is the huge position in Dell mean that it is a great company poised to go up, or is it a sign that once it starts to fall it will fall very hard as all the holders will run to the exits? Unfortunately I do not have a universal answer; I've found that I can answer this type of question after extensive study of the stock. You need to look for a change in "feel" of the stock. Sun Tzu

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