Spotlight: September 7, 2001 |
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Don't get me wrong the proverbial 'fat lady' continues to warm up her vocal chords as the Dow continues to drop.
Moreover, the U.S. equity markets are still on track for a complete collapse by years-end. However, as stock prices head off into the abyss certain market developments could permit a bullish spike in prices. Short interest on the NYSE has also set records in recent weeks. More specifically, total shares short are currently 1.7% of total shares on the NYSE, or an extremely high level when looking back at the last 20 years. With this in mind, could increased short exposure be telling us that a short covering rally is imminent? Many would argue yes. The flipside to this argument is that shorts have held strong since April, and as outflows from equities intensify short sellers will gain the ability to cover at their leisure. As an example of this type of market behavior, Barrick sells forward gold contracts when prices are high, and covers positions when prices are low – all that is needed is a liquid, and range driven gold market for Barrick to achieve success. By comparison, shorts in 2001 have sold the market when prices rise for no reason, and begin covering when the averages near the bottom of their ranges. As such, 1.7% short interest on the NYSE could be a meaningless number if no serious rally develops until April's lows are struck – or the point when short sellers may begin pulling money out. In sum, short sellers are a more important party in today's market than they have been for many years. Furthermore, fluctuation in short interest, and the psychological impact subsequent price movements may have on investors could decide where the bottom to this market rests. If prices do spike because of the onslaught of short covering sidelined investors may get excited – the result would
be a frantic attempt from both sides to buy as prices spiral higher. Needless to say, this would be a temporary
cheerleading session if the economy, and earnings situation did not readily improve. Moreover, if short sellers initiate
the price spike they would, in fact, possess adequate funds to enter short again after the market chasers arrive. |