Joe Duarte: Short Sellers & Scared Bulls Run To The Hills

- Market Insight – Technical Commentary -

September 1, 2010 (FinancialWire) (By Dr. Joe Duarte) (Go to http://www.financialwire.net/?s=cmmtry for all recent commentaries.) — Google, Inc. (NASDAQ: GOOG) is trying to find a bottom near 450 while the S&P 500 SPDR ETF (AMEX: SPY) hugs the 105 area, which corresponds to the key 1050 pivot point on the S&P 500 Index (SPX). The problem for all stocks, though, is that there is hardly any volume left in this market.

The economy looks terrible. The stock market looks ready to topple. Yet, short sellers, investors that attempt to make money when markets fall have decreased their participation in the market raising questions about where things really stand.

According to The Wall Street Journal: "Since this spring, short positions on the broad Standard & Poor's 500-share index have hovered around 4.3% of the shares available, according to Bespoke Investment Group. That is a steep drop from August 2008, when roughly 6% of shares on float were short, Bespoke found. In order to short a stock, a trader borrows a share and sells it, hoping to repurchase the stock at a lower price to make a profit. More interesting is the fact that Short interest in the S&P SmallCap 600 index is currently around 8.3%, down from roughly 15% in August 2008."

That says two things. One is that short sellers have no interest in taking chances on big stocks falling. But even the more speculative and potentially more profitable fall in thinly traded small stocks doesn't seem to be attractive in this market.

According to the report: "It is hard to pinpoint exactly why short selling has dropped out of vogue. Uncertainty over the economic recovery is likely the predominant factor. Others often cite questions over the implications of the coming midterm congressional elections." However, many seem to be citing the election as a reason to reduce exposure to the markets.

More than anything, it may be fatigue, as the market changes direction on a nearly daily basis. And the fatigue may be spreading, as Monday was the lowest volume day of trading on Wall Street for the whole year.

Here is a telling quote from the article: “There's a complete lack of interest from investors on either side," Mr. Hickey said. "It's kind of concerning. At least when there's short interest increasing during periods of market weakness, you have activity by investors. Right now, they're just apathetic.”

If you're looking for a silver lining, consider this. Mark Hulbert, the newsletter tracking guru recently noted: "Cheer up, beleaguered stock market investors! Corporate insiders have cut back on the pace of their selling of shares of their companies' stock — and increased the pace of their buying. They, therefore, are betting the market will soon rally. In fact, insiders' behavior at the end of August was more bullish than at any time since late March and early April of 2009, when the bull market was just three weeks old."

Hulbert also recently noted that in the short term timing newsletters he follows, the recommended allocation to stocks has fallen dramatically; "more than 54 percentage points in a little more than two weeks' time," adding "That should be enough pessimism to support a rally."

Are we near a significant buying opportunity in the stock market? Two interesting metrics suggest that maybe we are. One is the fact that short sellers seem to have given up. The other is that pessimism by market timers is rising and that corporate insiders are starting to see longer term buying opportunities.

The gloom is clearly thickening everywhere. We've noticed a significant drop in highway traffic over the last few days, and some of our usual haunts, such as drive-thru windows at Starbucks restaurants have been nearly empty of late.

It's pretty clear that things are bad, or that people think that things are bad, and that more and more of us are keeping our wallets in our pockets.

The real question is whether this is going to turn into a paralysis for the markets and the economy, or whether this is the prelude before a big move in the stock market.

Traditional sentiment analysis seems to be saying that a rally is near. Yet, traditional things seem to have stopped working in this market. All we can do is watch and wait.

(Go to http://www.financialwire.net/?s=joe+duarte to see more commentaries by Dr. Joe Duarte, and go to http://www.financialwire.net/2010/04/22/about-duarte/ for more about Dr. Duarte.)

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