Short Spectrum

"You've got to know the rules before you can break 'em. Otherwise it's no fun."
--Sonny Crockett (Miami Vice)

There's increasing banter about perma-bears and that 'nearly everyone is bearish.' Could be, but whenever I hear someone utter 'Everyone is ___' I think two words: confirmation bias.

Better to think in terms of a distribution of sentiment and the spectrum of behavior across it. After all, each time a share of stock changes hands, by definition, one party is bullish and the other side is bearish. The trick is to understand changes in the distribution of bulls and bears.

Along those lines I wanted to note this chart showing NASDAQ short interest at multi-year lows. Other indices indicate a similar decline in short side operations. The contrarian in me wants to say that this is bearish (general sentiment is usually wrong, less fuel for squeezage, etc.).

Then again, note that short interest rose with higher market prices and then declined with the general market break, suggesting short interest as a coincident rather than contrarian indicator. Add to that anecdotal evidence that many 'famous' bears such as Jim Rogers and Fleck are currently not short, and it makes you wonder just what what all of this suggests in terms of sentiment and future market direction.

For me, this means staying on the sidelines and waiting for clearer opportunities on either side--long or short.

no positions