It is true that excessive bearish sentiment can only lead to sharp rallies in the market. But.. how much of that sentiment has actual committed bearish bets? NYSE short interest ratio was not up that much from July (up about 1%) The 'consensus' thinking might have been that a steep sell-off will only begin with the most outrageous of all the stocks - i-nuts.
A lot of people, including yours truly, who have called the fundamentals of certain companies correctly to the downside have given-up on shorting them (like KO, G) At the same time, they subscribed to above thinking and shorted the nets. The net result is a well engineered upward crash for the nets lately - just when the real companies with poor fundamentals have been faltering. They don't have much support from the shorts!
Now, it appears that the recent strong show by semis and i-nuts is just that - a misplaced short-bets by the surviving bears. While there is no general meltdown, the market has been taking one by one and shooting them down. But there comes a time, the misplaced bearish bets will be covered or general market sentiment takes the turn for worse or both. Keep an eye on the "adults" they are gonna bring order to the chaos created by speculators's orgy.
Good read on bearish 'sentiments' vs 'committments.'
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Wednesday September 22, 11:24 am Eastern Time
Overseas bears smell blood as Wall St stumbles
By James Saft
LONDON, Sept 22 (Reuters) - As Wall Street and the dollar send a familiar autumn chill through global markets, long time transatlantic bears of U.S. shares are hoping that their season is at last at hand.
The dollar and U.S. stocks were dealt a fresh blow on Tuesday by news of yet another record U.S. trade deficit and the apparent lack of resolve among Japanese officials to stem the yen's rise.
The Dow Jones industrial average was expected to rally modestly on Wednesday but still stood nearly 4.8 percent below its August peak.
For global investors who have held that U.S. stock prices and the strong dollar are unsustainable, and who have been pummelled in recent years as successive Wall St falls have led to greater heights, a change could not come too soon.
''I have been making this argument for a couple of years and it has obviously been wrong in many ways but now the markets are starting to pay attention,'' said Tim Congdon, a former high-level economic advisor to the British government who thinks U.S. stocks are 25-50 percent overpriced.
With the U.S. dependent on annual flows of foreign cash of well over $300 billion, interest rates and by extention shares, are very vulnerable to changes in sentiment about the dollar.
''These trends just can't go on, they really can't -- something has to give,'' said Congdon, a managing director of Lombard Street Research.
ANALYSTS SEE WEAK DOLLAR IMPORTING INFLATION, DENTING SHARES
The risks of a weaker dollar to shares are twofold, analysts said. A slumping greenback will make U.S. assets less attractive to foreigners, who may choose to sell shares and repatriate the cash. A falling dollar also imports inflation, putting upward pressure on U.S. interest rates.
''If foreigners change their attitude to U.S. assets, two things will happen, the dollar will fall and U.S. yields will rise putting tremendous pressure on U.S. stocks which are already pretty stretched,'' said Albert Edwards, global strategist at Dresdner Kleinwort Benson, another long-time sceptic of the American economic miracle.
Edwards sees the Dow's recovery from its August 1998 tumble as an abberation that was only made possible as the Federal Reserve flooded the markets with liquidity, easing interest rates by 0.75 percentage points in a successful bid to avert a global credit crunch.
"The U.S. equity market has been like a vampire -- it has fed off the blood of Asia while Asia was in recession.
''But now that Asia, especially Japan, is back in gear, the competition for global investment cash is keener,'' he said.
BETTING ON CORRECTIONS BAD BET RECENTLY
To be sure, betting against the Dow has been a losing game during its long bull run, even in the most frightening circumstances.
In October 1997, fears over the Asian economic crisis touched off a 15 percent selloff, taking the Dow to an intraday low of 6,971 points.
This however, looked a bargain in April 1998 when the Dow broke through 9,000 points for the first time.
Just three months later another correction was prompted by Russia's default of its foreign debts, sending the Dow again some 20 percent lower.
Again, with the Dow now at 10,598, sceptics have not been rewarded.
''The brave U.S. investors have always bought on dips on the assumption that it would recover, as it always has done,'' said John Hatherly, head of research at M&G Investment Management.
''We know U.S. valuations are high and getting higher and higher by whatever measure you use, but you will need a sufficient change in the news flow to really damage investor sentiment,'' Hatherly said.
But Edwards of Dresdner Kleinwort is confident that the ball will bounce his way.
''I am still ultimately happy that when this all comes to rest you will see the market at half its current level.''
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