Ongoing Market Sell-Off: It's Not The Short Sellers 13 comments
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In a surprising turn of events (for some), the market sold off last Monday on news that the TARP bill failed, and again this past Friday on the news that the bill passed, even with the ban on shorting financial stocks still in place and extended for another few weeks (see WSJ article here).
How could this happen? Isn't the short-selling ban suppose to put a floor on the market? Of course not, but the current sell-off of the market at a time when a ban on short selling exists for over 1,000 stocks illustrates in part how current portfolio positions are still being reduced.
So who is doing the selling? It is probably coming a little bit from everywhere, but the hedge funds in particular appear to be taking every market rally as an opportunity to sell into strength.
Recent news highlights how hedge funds are experiencing a decade-worst level of performance (see WSJ article), with September possibly being one of the worst months on record for many funds, with losses expected to be between 5-9 percent on average.
Such poor performance is also causing an increase in withdrawals. In particular, funds-of-funds [FoF], which invest in individual hedge funds in order to diversify risk, are helping to facilitate the hedge fund redemption as some investors are withdrawing up to 20 percent of assets under management (see WSJ article).
On average, FoF were down 6.4 percent in August, even worse than the already terrible 4.9 percent loss experience by individual hedge funds. The problem is significant given that FoF account for about 40 percent of the $2 trillion hedge fund market.
Many FoF also make it easy to withdraw money, as opposed to most hedge funds that have longer lockups and notification periods. To compound the problem, many hedge funds also became over-weighted in energy and commodity stocks just as the market was topping this summer, and are continuing to unwind these positions.
Redemption notices put in near the end of the summer are also now meeting their time restrictions and being executed. Many funds had hoped to see a recovery before any redemption requests came due, but many investors are not having second thoughts, and are going forth with withdraws.
The wave of selling may continue for a while, regardless of any short-selling ban.
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This article has 13 comments:
So why do prices move? They move down when buyers are not willing to pay as much for it as they did before, and move up when sellers are not willing to part with their stock for the price they did before. The whole concept that sellers (short or otherwise) move prices down is based on a misconception and poor understanding of the market.
Are you willing to pay $20 a share for Citigroup? No. That's why it's trading at $18. Even if no one was willing to sell a single share of Citi, your perception of its value has just determined its price.
Actually you are right but wrong as I understand the market. You are wrong about Selling Short. I sold those shares without actually buying them. I borrowed them. That's why short selling drives the price down. There are more shares to be sold than being bought. It's the old supply and demand deal. When a big Hedge fund or Pension Fund decides to short oranges they can drive the price down. This is especially true if multiple Funds start shorting. I may hold a minority opinion here; but, these fund are large enough to cause trends (down or up). At the very least they can cause waves.
The reverse is true when they decide to cover those shorts. If you think I don't know what I'm talking about, just watch some stocks (especially one that's price has been downbeaten during the week for no apparent reason) starting at about 3:00 pm eastern time on a friday afternoon. It really gets fun on the triple withcing friday (or what ever it is they call it). Short squeeze, short squeeze if you please.
Bottom line, the SEC and other countries wouldn't have banned it if it made no difference.
Anyone with a properly functioning brain in their head. The Government just did their best to "help". That alone is reason enough to sell.
Read a little bit atleast about how markets work!
See this:
DECK is at $100.
Short sellers DUMP tons of short shares at $100.
Now there are 50,000 shares at the ask of $100
Buyers are taking 10,000 shares every 1 minute
You have to wait for 10 minutes to MAYBE see a chance to get more than $100 for the legitimate shares you want to sell.
If you want to sell NOW, you must undercut to say $99.90.
Not a problem for the program trader shorts, their ask INSTANTLY goes to $99.75 and undercuts you - you are now off the ask and your shares don't sell. You lower to $99.50 - shorts immediately lower to $99. You drop to $97 and finally yours sell.
With unlimited program executed short selling, any stock can be knocked down a good 10% or more on any given day.
> jack
People often rattle words like news being priced in or discounted, however, the simple truth is markets are nothing more than supply vs. demand. For the market to move upwards, there simply has to be more buyers than sellers. Sounds simple right, it is, so let's think about Friday and it should be clear why the market had to fall and fall hard.
Everyone I spoke to was waiting for this bill to pass in order to sell their holdings. The whole world expected a rally, but everyone was waiting for this rally in order to lighten up, to sell...............
Why, this is simple also....... For the first time in my trading life (over 20 years) all the media as well as the two presidential candidates have been hammering into everyones head the severity of this financial crisis. They have likened it to the great depression, the Titanic and so forth, now, add this fact to a year where most people have watched their portfolios, 401k's, and mutual funds losing value on a monthly basis and you have a simple recepie, people want out of stocks period.
Why did Friday have to fall, again people wanted out, they were waiting in mass for this rally in order to sell and once the selling started, who would come in to catch this falling knife? The market had to fall right in to the close, again, who would buy? The market will be there another day, so why buy in now? This is a time to be in cash, money markets, T-bills, whatever, anything but stocks.
The market will no doubt come up again, but first there must be a consolidation at the lows and clearly we haven't reached that point just yet. In fact, we're not even close.
What's interesting is when the market rises, it will rise quickly and for the same reason as this current fall. Supply vs. Demand. When the news changes a bit and the crisis on Wall Street is not the headline story every hour of every day, people will begin to buy stocks again. The rise will be fast and furious because prices will be very depressed and once the buyers arrive and purchase Diamonds or Spyders at expremely discounted prices, who will be in such a rush to sell them? The market will move up hundreds of points and those who bought at or near the bottom will simply hold on for the ride.
Its all about supply vs demand, that really the point of my article.....
Hope this is useful to someone.