Notice the green line in the chart below. How do credit balances end up in margin accounts?
Short sales create credit balances. The green line shows the astronomical amount of money that is short this market. The bull leg that began last summer has been the longest and most persistant short squeeze in history. Yet, more and more stock is pilling on the short side.
Is this phenomenon bullish or bearish? The answer is both. Short term, the shorts end up getting squeezed and beat up pretty bad. The same thing happened as the top approached in 2000. Short sellers end up unwittinly prolonging a bull market even as its foundation becomes more and more flimsy.
Eventually motivations to liquidate elevate to such a high level that no amount of short covering can keep the market from falling. Heavy short selling adds additional false value to a market that is already over priced. The end result is a bear market that is more severe than it would have been without the heavy shorting.
Why a bear market? More economists need to understand the natural laws that are explained in ancient books of wisdom. Why do recessions occur? Why are there business cycles and bear markets?
In an economic boom, too many begin to reap where they have not sowed.
James
Huckleberries And Dilemmas For Bears
Started by
James Quillian
, Feb 04 2007 12:08 AM
2 replies to this topic
#2
Posted 04 February 2007 - 12:50 AM
James,
Its also an artifact of the new hedgefund industry. Hedge funds will take strategies that are based on pairing to reduce risk.
For instance, they may buy convertable bonds and short stocks. Or they may go long GM, short Ford.
I wouldn't necessarily put this in a category that "everyone is bearish and therefore shorting the market".
I'm not sure about now, but some time ago, people were playing long large caps, short small caps strategy. This would explain RUTs general underperformance as of late.
With the record amount of money flowing into the hedgefund industry, I expect this trend to continue.
Qui custodiet ipsos custodes?
#3
Posted 04 February 2007 - 07:17 PM
Keep in mind how many deals there are and have been. This begets arbitrage which will throw the numbers off a bit.
Mark
Mark S Young
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