The biggest Standard & Poor’s 500 Index rally in more than five decades is forcing stock market bears to abandon short sales, cutting them to the lowest level since 2007 last month.I would object: I'd say people have lost any sense of risk, in a market that barely had a 5% micro-correction during the past 10 months or so.
Shares borrowed and sold to profit from declines dropped four straight months and represented 3.3 percent of all stock in January, according to data compiled by NYSE Euronext. Pessimists are giving up after missing the 95 percent rally in the S&P 500 spurred by the fastest earnings growth since 1994. The monthly decrease comes as individuals added $17.6 billion to U.S. mutual funds this year after withdrawing money since April.
While short sales rose 2.8 percent in the two weeks ended Feb. 15, January’s low may foreshadow slower gains in equities as the pool of new investors shrinks, according to Doug Burtnick of Aberdeen, Scotland-based Aberdeen Asset Management Plc. To Laszlo Birinyi of Birinyi Associates Inc. in Westport, Connecticut, levels haven’t fallen enough to reverse gains or stop equities from climbing as the economy expands.
“When everybody is leaning on the same side of the boat, then there’s a risk things may go in the other direction,” said Philadelphia-based Burtnick, the senior investment manager of a fund that seeks to profit from both rising and falling stocks at Aberdeen, which oversees about $287 billion. “The market’s liquidity-driven tailwind has made people very careful on how they want to position themselves.”
There are about 12 times as many investors speculating on gains in U.S. shares as there are on declines, a three-year high, according to New York-based Data Explorers, which provides research on short sales and stock lending. The firm’s long-short ratio for U.S. equities rose to 12.4 on Feb. 1 from 6.5 in September 2008 when Lehman Brothers Holdings Inc. collapsed at the height of the financial crisis.
“I don’t see a wholesale capitulation of the short sellers,” Birinyi said. “We’re still far from the 1 or 2 percent short interest which characterized most of the 1990s and the previous decade. The bears haven’t thrown in the towel.”
Shares sold short have made up 2.3 percent of the U.S. stock market on average since 1995, according to data compiled by NYSE. The level was 1.9 percent from 1995 to December 2007. The world’s largest economy shrank 4.1 percent from the fourth quarter of 2007 to the second quarter of 2009, the most during any recession since the 1930s, according to the U.S. Department of Commerce. Short interest peaked at 4.9 percent in July 2008.
Bearish bets have held steady when adjusted for lower stock trading. They amount to 2.9 times the average daily volume on U.S. exchanges this year, data compiled by Bloomberg show. The level compares with a median of 2.8 in the past three years.
Individuals have added $17.6 billion to U.S. mutual funds this year, following $94.7 billion in withdrawals during the last eight months of 2010, according to the Washington-based Investment Company Institute. The inflows this year are the first since April, when the S&P 500 began a 16 percent decline through July.
The S&P 500 has fallen 0.7 percent on average in the 60 days after mutual fund inflows were at least January’s level of $6.1 billion, based on 10 years of ICI data tracked by Bloomberg. The figures compare with a 0.9 percent advance in the two months following withdrawals of that much.