Short Sales: An 18-Year Low

Useful chart from Bloomberg showing that short sales on the NYSE have touched an 18-year low. It is one of those paradoxical things during a declining market, of course. Now, much like with the Pelosi graph it is worth pointing out that is in absolute rather than percentage terms, but in this case using absolute numbers understates the decline.

The graph is accompanied by a useful article on what short-sellers are up to right now. Most sound somewhat cautious, expecting some sort of bounce.

U.S. stocks trade at an average 15.23 times earnings after falling as low as 15.20 in November, the cheapest since 1990, based on an analysis by Robert Shiller, the Yale University professor whose 2000 book “Irrational Exuberance” predicted the market’s collapse. His analysis uses a decade of earnings to smooth out short-term fluctuations.

“I would be very cautious about being short this market right now,” said Dan Veru, who manages about $2.4 billion and can bet on gains and declines in equities as chief investment officer of Palisade Capital Management LLC in Fort Lee, New Jersey. “It’s very dicey.”

Comments

[Crank Monkey:]

Musical chairs -- it's the most dangerous game in the world.

Feb 09 02:32 PM

[Consider_this:]

Oh no... If there's an overabundance of shorts, then we can actually expect reasonable build up of shorts that will cause massive short covering rallies, and hope that one of those rallies will be big enough to actually start a real ascend in the market.

In other words, shorts are like dry tinder or fire starters.

Now, this chart tells me that there's actually a decline in shorts! Which means our decline is not going to be saved by short covering rallies as much as I hoped.

This is actually very bad news for the market.

This means the decline is sustainable and not likely to end on its own soon. There's no danger of a "decline fatigue" anytime soon.

Feb 09 02:34 PM

[ROLEX18:]

Who watches it anyway?
Shorts like me already made their money, now we let you buy the more the better, then we hit a hammer at higher prices.

Feb 09 02:58 PM

[mr freddo:]

Does that explain why volatility has declined in 2009?

I was wondering when they would do a little skit on the Daily Show after a 300 point decline in the market. Reporting jubilation from Wall Street, and middle America after it was discovered that most Americans had gone short.

After this debacle has past, I would like to see us get back to old fashioned investing. Buy a stock, hold it for years, collect the dividends and be rewarded when the value of the company increases due to a great product, excellent strategic plan, sound management, and dedicated employees.

At the very least let's bring back the uptick rule, eliminate naked shorting, and eliminate naked CDS's as well. Complexity has not served us well. Lets go back KISS, keep it simple, stupid.

Feb 09 03:17 PM

[CJJ:]

I'm glad anyone can find a negative in any story as you commentors are always able to do. Less shorts is bad for the market. More shorts is bad for the market. Guess what you just nailed it. Shorts add nothing to the market except making money for themselves. See Rolex. He's not out there trying to sure up the market by shorting companies, he's out to make as much money as he can.

This crap is so simple. Recessions are the times when people need to spend and not save, but in every recession people save and don't spend. No S. Why do I have to read 100 stories about this crap.

Same with shorts. They are out to make money and destoy companies. They are not good for markets and anyone who says they are is a shorter or hedge fund. And like Rolex says, at this point after the last year, who cares. Shorts have made plenty of money. Doesn't matter who they targeted(outside of perhaps a handful of companies) they made a fortune.
Isn't this how bubbles work. People chase the profits. It gets so easy to make money anyone can do it. You don't even need a strategy, just a dartboard.
You understand shorts during this downturn would short any company. Any. Did not matter. Basically the market has acted as if it is not profitable or a good idea to own any business. None of them. And it will get worse.
All companies that can should go private as soon as possible. Markets are irrational. They are ticking time bombs and right now the irrationality of humans on the global basis and detonating the bombs with no relent.

These people(shorts) are out to make money and destroy businesses and right now they are winning. The only silver lining is they don't seem to realize that if this all plays out like they are betting their "profits" are going to be worthless in the end. This bubble will pop too and shorts may live to play another day but I wouldn't mind their "perp walks" to come to fruition, especially when they realize they're the perps and the sheeple are mad and out for revenge.

Feb 09 03:39 PM

[outtafavr:]

The chart and the quotation imply that STOCK VALUATIONS are at an 18 year low. How does the author extrapolate that short sales are at an 18 year low from this?

Feb 09 03:40 PM

[2houndz:]

Outtafavr -
Maybe the author figured it out from the text on the chart that says "The number of shares borrowed and sold..... fell to a 28 percent low...".
I'm as much for pointing out errors as the next guy, but before we discredit someone maybe we should actually read his evidence.

Feb 09 03:57 PM

[Moon Kil Woong:]

This is not a good sign. Short sellers and put buyers act as a sort of spring in demand when the market goes down if they are dong arbitrage. They take the gains, buy back the stock, and sometimes even go long. Likewise, even if they are not arbitrating, when the market goes up, their covering helps give it an extra push.

Less of these participants will lower volume and make it harder for the market to inevitably rebound. I suspect the drop is due not so much about less negative sentiment but the drop in hedge funds and wiping away of some market speculators.

Feb 09 10:01 PM

[armadillo:]

This short vs long thing is a ridiculous scenario made up by the media, politicians and the ignorant. I agree - lets keep things in check to avoid manipulation, but people should be versed in both methods and use them appropriately to best diversify their portfolios. This is not a moral question, its about keeping your capital and growing it.
Most shorts have covered so there is not going to be a nice V shape curve spurred on by a short covering rally. Probably languish for a while until people shake off their fear blinders.

Feb 10 11:37 AM

[kelm:]

This market is puzzling a lot of people and driving a lot of day traders crazy as well. We have had all of the elements in place for a really strong bear market rally for some time - but it hasn't happened. The bad news keeps overwhelming the start of any buying frenzy. At the same time we have not had the massive sell-off either. Many expect another leg down but many are waiting for clear signs that it is underway before committing on the short side. The reduction of shorts in the market is consistent with a lack of powerful movement up (fewer shorts needing to cover so the acceleration upwards doesn't happen) and a lack of short conviction to really drive the market lower. Unfortunately we may be stuck in this trading range from hell for quite a while.

Feb 10 11:47 AM