Tracking SPY: A Glimpse at Market Forces at Work

Nov.14.07 | About: SPDR S&P (SPY)

For the better part of the fall, analysts at Birinyi Associates have been discussing how fundamental changes in US markets have the capacity to cause an unforeseen or unexpected impact. The chart below illustrated yet another unmeasured weight that is capable of leaning on the broader market.

ETFs are becoming increasingly popular, but their mode of operation seems mysterious (some for example operate in futures and options markets, while others buy and sell positions in the underlying stocks.)

Below we show the SPY ETF since its inception in 1993, and the percent of total shares outstanding that are sold short. Granted, the ratio was almost equal in 1997, but the lower chart illustrated that the total shares outstanding have increased over 1000% since then. Also, the volatility in the number of shares outstanding illustrates that large institutions, hedge funds primarily, are using SPY as an easy way to adjust their exposure. The market capitalization for SPY is currently about $72 billion, which represents only 6% of the roughly $1.3 trillion indexed to the S&P 500 alone.

In short, the example below is a very small example of the larger unseen forces at work on the broad market.

click to enlarge