acting-man.com / By Pater Tenebrarum / March 5, 2013
Another Warning Sign Emerges
Fully cognizant of the fact that monetary pumping has continued to allow the market to defy all sorts of warning signs that have popped up in recent weeks and keep its slowly grinding levitation to higher levels intact, we still want to point out when new worrisome signals are coming to light. One (or rather, yet another one) has just done so: short sellers have apparently capitulated to a noticeable extent.
“Investors reduced bearish stock bets to the lowest level since at least 2007 as the bull market in American equities begins its fifth year.
Short sales in the Standard & Poor’s Composite 1,500 Index fell to 5.6 percent of shares available for trading in February, down from a record 12 percent during the credit crisis and the lowest ever in data compiled by Bespoke Investment Group and Bloomberg starting six years ago. The last time the number of shares borrowed and sold short approached this level, the equity gauge lost 3.3 percent in the next three months.
Bulls say the capitulation by market bears shows the rally remains intact and that more money will flow into stocks after individuals sent $37.9 billion to mutual funds in January, the most since 2004. It also means a source of demand is diminishing, a traditional signal for caution in an aging bull market. Less than one percent of the shares of Ford Motor Co. and Cabot Oil & Gas Corp. (COG) have been borrowed and sold short by speculators hoping to return them to owners once prices fall.
“When you look at short interest, and it’s low like right now, it means people are very, very bullish about the market,” Uri Landesman, president of New York-based hedge fund Platinum Partners, which manages $1.15 billion, said in a Feb. 28 phone interview. “When that happens, it’s a bearish sign, because if all minds change, there’s downside, not upside.”
It would certainly be the first wide-spread capitulation of shorts ever that has ultimately ‘left the rally intact’, so we would tend to agree with the gentleman from Platinum Partners. It is also difficult to see why sudden large retail inflows should be regarded as bullish when the vast bulk of the rally actually occurred while there were retail outflows. Only one of these can be a bullish datum, not both.
There is also another call of the ‘the rally is only just beginning‘ type, this time uttered by none other than Abby Joseph Cohen. As a reminder: her ‘must own’ portfolio of tech stocks for 2001 lost 89% of its value at its nadir; this was not a particular fault of her picks as such, it was merely a result of her advice being of no help once a bear market is underway, since she denies that bear markets even exist. It is the safest attitude a market strategist who’s in the public eye can adopt, as stocks have risen approximately 67% of the time over the past century. By staying bullish at all times, one has an automatic 2:1 hit rate.
The SPX daily – a slow ‘grind’ higher