NYSE Short Sales Top September's Peak, So What's Your Move
Up, up, and up! Or down, down, and down some more. Where’s Friday’s Standard and Poors 500 Index going? Will the U.S economy, at its slowest pace in 60 years, grow faster than an annualized 2.1% once the election is over? Is Europe ever going to solve its problems, the financial pillar that was Germany's business confidence is at a two year low. China is now seeing its slowest growth in three years and this week Bloomberg reported that New York Stock Exchange total short sales peaked at 5.35%. This is only a one-sided argument, what do the bulls think, and if you were a Portfolio Manager, what would your call be on SPX? Read more to find out…
June’s total short sales eclipsed the previous high on September 15th, 2011 of 5.28% with an index low of about 1099.23. Since April 4th almost $1 trillion has been erased while investors have been speculating on profitable short sales the last two years the market’s anticipation / reaction to central banking policies have erased any real gains. Even short-biased hedge funds which make up the most of the 19 strategies tracked by Hedge Fund Research are down 8.3% for 2012. Further evidence is given in a statement by Eric Teal, Chief Investment Officer at First Citizens Bancshares Inc saying that,
A pattern that appears to be unfolding again is a third year of weakness during the summer.”
Conversely, from the index's low in September the SPX then advanced 29% over the next six months along with the 23 of the most shorted equities while WHR and PHM, the two heaviest shorted advanced 21% on average until April 2nd, the index’s four-year high.
As such, bulls are making the argument that for the 14th consecutive quarter, firm’s on average are beating earnings estimates and Euro leaders are in crunch mode, working harder than before to stop the flow of red ink. But they also have two more reasons to be optimistic. One, the average P/E in 2012 is only 13.8, 16% below average since 1954. Two, the VIX on 1-month SPX options is down 28% to 16.74, below the market complacency level of 20 since June 20th.
However, let's keep in mind the market's reaction to past Federal Reserve's policy initiatives. According to Lance Roberts of Street Talk Advisors,
The current market rally...is pricing in any potential action from the Fed...”
Now that you've gotten the full story, bulls and bears what is your market call for the SPX going forward? Would you long or short the index? Which insturment would you use derivatives, equities, or futures? Does your strategy entail a basic or complex execution? Let's hear it!
