6 replies to this topic

[OEXCHAOS]

I was short the Russell for clients into early August and did quite well with it. I also covered just ahead of the low. I warned everyone who would listen that the Russell was going to rally hard. Why was I short and why did I cover and look higher? The no up-tick rule. Traders used to have to wait for a plus-tick in order to short, but that requirement was recently dropped, allowing anyone to short even on down ticks. In my opinion, the smaller hedge funds and specs piled on the shorts during the decline. Smaller, lower quality, more overpriced stocks are no-brainer shorts, right? Riiiiight... Down they went, even faster than they might have ordinarily thanks to all that aggressive shorting. Smaller, lower quality stocks with tons of fast money shorts in them are also very "squeeze"-prone. Back in the 80's, I used to do some institutional business at Legg Mason. Let me tell you, trying to buy or sell 100,000 shares of a small company fast is tricky. If you tip your hand or move too much too fast, you're going to be looking at a significant move against you. This is what I believe has been happening in the Rut recently. Too many short "amateurs" (or pro's who trade like amateurs). Is there a serious valuation problem there? Yes. There's also a serious liquidity problem there, in both directions. In my view, the covering is just about over (why else would folks be paying up for overpriced stocks in a sloppy market if they weren't capitulating on shorts?), and this sector will be the place to short again (maybe even today), but if you do get short, don't over-stay your welcome unless you've got deep pockets or you're well hedged with longs. Mark

[Doug]

I believe the Russell is the best indicator of fund manager sentiment and it appears they are buying again. The Russell is up +27 points for the week or +3.3% compared to only a 1.5%-1.9% gain for the other indexes. It appears the influx of quarter end retirement cash is being put to work in the small caps and that suggests fund managers are no longer afraid of another dip in October. This is a bullish signal and the bounce has put the Russell within 25 points of its July high at 856. If the Russell continues to outpace the rest of the indexes and we get good news on Friday we could see a breakout over that high and that would trigger a serious upward move in the broader market. The keyword in that sentence was of course "if."

Regards,

[OEXCHAOS]

I know that liquidity argument (I believe it, especially in retrospect), but this time, and in the context of the decline, I don't buy it. The Rut is over priced and big fund managers know it. I don't think that they are the big buyers in this sector. Mark

[eminimee]

Gap fill or remain an island? Only time will tell..Gap fill is at 836.20

[Cirrus]

I was short the Russell for clients into early August and did quite well with it. I also covered just ahead of the low. I warned everyone who would listen that the Russell was going to rally hard.

Why was I short and why did I cover and look higher?

The no up-tick rule. Traders used to have to wait for a plus-tick in order to short, but that requirement was recently dropped, allowing anyone to short even on down ticks.

In my opinion, the smaller hedge funds and specs piled on the shorts during the decline. Smaller, lower quality, more overpriced stocks are no-brainer shorts, right? Riiiiight... Down they went, even faster than they might have ordinarily thanks to all that aggressive shorting.

Smaller, lower quality stocks with tons of fast money shorts in them are also very "squeeze"-prone. Back in the 80's, I used to do some institutional business at Legg Mason. Let me tell you, trying to buy or sell 100,000 shares of a small company fast is tricky. If you tip your hand or move too much too fast, you're going to be looking at a significant move against you.

This is what I believe has been happening in the Rut recently. Too many short "amateurs" (or pro's who trade like amateurs). Is there a serious valuation problem there? Yes. There's also a serious liquidity problem there, in both directions.

In my view, the covering is just about over (why else would folks be paying up for overpriced stocks in a sloppy market if they weren't capitulating on shorts?), and this sector will be the place to short again (maybe even today), but if you do get short, don't over-stay your welcome unless you've got deep pockets or you're well hedged with longs.

Mark

Agree Mark. There's never been a better time for bear raids. IMO, the next bear market, if it ever comes, will be quite fun.

[SemiBizz]

It is all about % of institutional ownership.

[greenie]

Here is my theory. After the July-Aug decline and Aug 13th low, many players went to long SPX or NDX, short RUT for this 1.5 month rebound. Now they are closing the hedged position and going outright short on major indices. Check action on NDX, SPX and RUT from friday to monday, and you will know. Similar things happen after Feb decline - Apr rally. Check the homebuilders during late April. They were showing unusual strength for few days.