here ya go, short away and add some gasoline to the fire
Bearish bets jump on NYSE
Short positions continue to grow in number as the markets continue their downward spiral.
July 22, 2002: 3:01 PM EDT
By Andrew Stein, CNN/Money Staff Writer
NEW YORK (CNN/Money) - As the stock-market retreat continues, there are few signs of the bears going into hibernation, with the number of bets that the markets will fall hitting a record high in July.
After hitting a record in June, short interest on the New York Stock Exchange climbed 4.8 percent in the four weeks through July 15. There were 7.55 billion short positions in July, up from 7.20 billion in June, according to the Wall Street Journal.
To short, investors borrow shares, sell them at a lower price (when all goes according to plan), and receive the proceeds. Short sellers are betting the stock price will drop, so they can repay the loan with cheaper shares, enabling them to pocket the difference.
The record bearishness cuts two ways. Some think it represents a darkening cloud over the market, that will make it more difficult for stocks to post a sustained rally. Others see it as a sign that pessimism is nearing an apex and too many people are now short, just as too many were going long on the way up.
The bear case
Eventually, the markets will stop falling and buyers will come out of hiding to push stock prices higher. But in the meantime, skeptics argue any rallies will be short-term ones, triggered by "short coverings."
Largest short positions on NYSE
Company Short interest Change since June 14
Lucent Tech. 377,812,287 10,663,339
Nortel Networks 315,463,705 -15,263,002
Sprint-PCS 151,368,031 15,781,789
Kmart Corp. 91,807,298 -1,913,415
Xerox Corp. 83,226,099 6,330,492
Conseco Inc. 78,616,209 -31,863
AT&T Wireless 77,774,101 -1,153,622
Cendant Corp. 72,803,870 -749,643
Motorola Inc. 70,414,948 -9,793,942
Corning Inc. 63,460,363 5,220,716
Source: Wall Street Journal
Scared of potential rallies that would cause them to lose money, short sellers often rush to buy or "cover" their short positions. That buying pushes the market higher, forcing other shorts to also cover -- but the ensuing rally is not sustainable.
Short covering moves usually come in quick bursts, and could be confused with a market's rally off of its bottom, said Jim Hedges, president of LJH Global Investments, a Florida-based hedge fund.
"With every passing day, investors' confidence in the near-term market strength falls," said Hedges. "With that you see many 'fool's rallies' in the market that are more likely a function of the short interest coverings. As the markets continue to drop, we come ever closer to that glorious 'bottom,' and as such short coverings should accelerate as people try to make what [profits] they can before a snap back."
"You recognize [short covering] during periods of multiple 'fools rallies' which are periods where you have strong intraday snap-backs," he continued.
For a substantial number of short positions to be flushed out, investors need a reason to cover their positions, said Tony Dwyer, chief market strategist for Kirlin Securities.
"Either valuations become attractive [so investors take up long positions] or there is a huge price dislocation, such as the drop following Sept. 11," said Dywer.
The market's recent downward spiral may qualify for the huge price drop Dwyer mentioned, as the Dow hovers near its post Sept. 11 low and the Nasdaq languishes around five-year low.
Hedges added that most short sellers cover positions after a huge drop or a string of declines to avoid caught on a rebound, and this may add to the buying following a significant drop.
"Subsequent to a big event such as Sept. 11 or a string of negative days, there is overselling. When investors realize this, the market rebounds and short sellers will cover," he added.
Who's being shorted?
Short sellers are mum when it comes to specific stocks they are shorting, but telecom stocks make up six out of the 10 most heavily shorted stocks on the New York Stock Exchange, according to the Wall Street Journal.
Largest short position changes on NYSE
Company Short interest Change since June 14
AES Corp. 59,647,323 33,896,080
Elan Corp. 35,558,201 24,699,622
Mirant Corp. 25,002,071 19,716,310
Sprint-PCS 151,368,031 15,781,789
Agere Systems 25,154,389 14,167,571
Qwest Comm. 48,081,133 13,916,925
Lucent Tech. 377,812,287 10,663,339
Tyco Intl. 48,800,824 10,101,133
El Paso Corp. 20,566,964 9,408,920
Cablevision 26,604,011 9,177,875
Source: Wall Street Journal
AES Corp., Elan Corp. and Mirant Corp. top the list of companies with the largest short interest increases within the month, according to the paper.
The contrarian view
While short interest balloons on the exchanges, some investors may see the building negative sentiment as a sign that the markets are nearing a bottom and might be on the way up.
"The higher short interest goes, the more eventual buyers there will be," said Paul Cherney, chief market strategist with Standard & Poor's. "It represents buying potential, because the shorts can't book profits without buying. These short-covering rallies take about one-and-a-half trading sessions, but they can't be seen as an overly bullish sign."
Kirlin's Dywer said investors have become more cautious with regarding rising short interest as a sign of buying potential.
"People paid attention to that in the past, but it's happened too many times when it didn't work," he said. "People will pay attention, but less so than before."
As far as short interest nearing a bottom, Hedges said it happens when fundamentals outweigh lower stock prices. "The problem, though, is that point is not easy to recognize." |
