is si chart on home page more current than numbers on home page for dow and naz? how delayed is the chart?
Following is a piece that sheds some light on how you're being whipsawed, since you may have forgotten the old adage, "Don't fight the tape":
Shorts' Stature Keeps Growing
By Rebecca Byrne
Staff Reporter
10/10/2002 07:01 AM EDT
Click here for more stories by Rebecca Byrne
The euphoria that propelled stocks in the bubble years is now being felt on the downside, enriching shorts as the averages repeatedly touch multiyear lows. Is the kind of shock that ended the bull market now in the cards for the bears?
After two years of vicious price declines, short-sellers have become bolder than ever, placing a record number of bets that stocks will continue their descent. The level of short interest, or the number of shares that have been sold and not bought back, hit an all-time high this summer, and experts say they haven't seen any abatement in the selling.
"The market is playing into their hands," said Douglas Raborn, who tracks short-selling activity for Aspen Grove Capital Management. "The [shorts] have made so much money that they're taking on more risk."
Raborn said his firm's index of short funds rose 10% in September and is up 40% year to date. That's the best performance since 1990.
Meanwhile, the level of put options, or options to sell stocks at a certain date in the future, have also risen significantly this year, another indication that investors generally expect the market to go down.
All of this stands in sharp contrast to early 2000, when margin debt rose to record levels as investors borrowed money from their brokers in order to buy more shares. That speculation contributed in part to the market's collapse: as brokers demanded that the loans be repaid, investors were forced to liquidate their holdings, prompting waves of selling.
Just as the overly optimistic speculation led to the market's downfall back then, so the current pessimism could ultimately prove helpful to the market, if and when the economy recovers, say some analysts. The theory goes that as stocks begin to rise, short players will scramble to cover their positions, sending prices sharply higher.
"We think there could be a blowup to the upside because of the massive short interest," Raborn said. "So you could see a day that the Dow jumps 1000 points because of short-covering."
Stocks with very high levels of short interest would do particularly well, notes Stanley Nabi, managing director of Credit Suisse First Boston. Among them are Motorola (MOT:NYSE - news - commentary - research - analysis), Xerox (XRX:NYSE - news - commentary - research - analysis)and AT&T (T:NYSE - news - commentary - research - analysis), which all saw short interest climb more than 20% in September from the prior month. Lucent (LU:NYSE - news - commentary - research - analysis), Nortel (NT:NYSE - news - commentary - research - analysis), Qwest (Q:NYSE - news - commentary - research - analysis), Sprint (FON:NYSE - news - commentary - research - analysis), Nextel Communications (NXTL:Nasdaq - news - commentary - research - analysis) and Cisco (CSCO:Nasdaq - news - commentary - research - analysis) also have some of the highest levels of short interest.
"The greater the short, the greater the bearishness, and deep bearishness is usually considered a contrarian indicator," Nabi said. "The stocks where people have gone short are the ones that will probably spike when the market turns around."
Still, he noted that short interest relative to trading volume isn't "all that high" and said he doesn't believe a wave of short covering will give the overall market a meaningful boost.
Diane Garnick, global equity strategist at State Street Global Advisors, agrees. She noted that short-sellers have been eager to lock in gains this year amid such difficult market conditions. And because each rally has proven so ephemeral, traders are highly skeptical, meaning there is much less urgency to buy back shares whenever the market moves up.
"A lot of short traders will sell a stock and when the price drops they buy it back. That pushes the price up again and then they see a whole new opportunity to short," Garnick said.
Bill Fleckenstein, president of Fleckenstein Capital and contributor to TheStreet.com's sister site RealMoney, added that a lot of the short interest in the market isn't at risk because much of it is a function of market making and derivatives hedging.
While a rally could prompt a short squeeze in some stocks, he said, it isn't wise to buy equities based on their high level of short interest. "The shorts tend to be right," he said. "If anyone thinks the economic recovery is going to precipitate short-covering, they're wrong."
Short interest relative to total shares outstanding is currently tracking at around 2.3%, well above the average level of around 1.4%. Interestingly, margin debt as a percentage of shares outstanding peaked out at 2.4% in February 2000.
But Jeffrey Kleintop, chief investment strategist at PNC advisors, noted that it took more than a year for margin debt to get back to its long term average and he suggested it could take an equal amount of time for many of the shorts to get washed out.
"Generally, people on the short side tend to stay short a lot longer than they should," he said. "When the economy starts to improve, we may see an initial shift back by the lesser experienced or perhaps smarter short-sellers but [short covering] won't drive the market an enormous amount. It takes a while to bleed out both on the margin side and on the short side." |
