Who Is Left To Sell

Many readers are likely wondering why if I am so bearish on the economy don't I just short the market? The question I keep coming back to is who is left to sell? The 15% drop that culminated a few weeks back was largely the result of hedge fund derisking. By most reports hedge funds now have very low levels of exposure to the stock market. Individuals never fully embraced the rally so I doubt that they have much to sell.

In the previous cycle everybody came in over leveraged and there was  a lot of forced selling. That is very unlikely to happen this time around. I was planning on being short for the Summer because I though that the rally would suck the hedge funds back in, but that does not seem to be happening. While I am certain the market can go down further, I don't have the conviction to go short. That said, with the economy imploding I have no intention of going long other than for a trade. The sidelines seem fine.


Anonymous said...

Flows are not necessary to move the market. This is how it seems to work day to day, but they are not necessary.

Best to demonstrate with an example (albeit exaggerated).

If a publicly traded bank is taken over by the FDIC Friday night, its shares would worth much less on Monday without a single 'seller' hitting a bid.

Stock prices move with flow, surely. But they also move with changes in perceived value regardless of flow.

Recently the perception was a V shaped recovery and new highs in S&P earning in the near future. That perception is only just changing on the fringes. Most are perma-bears coming out of hibernation, not bulls changing their tune.

And the bulls are 99% of the equity in this market, pensions, endowments, mutual funds, family trusts... all long, all the time.

When their perception changes, if the economy double dips and earning roll over, we will be a whole heck of a lot lower than 15% off the highs.

I know this is all longer term than what you're looking at. But I don't expect anyone to ring a bell when this perception starts to shift. There will be precious few rallies to sell the next time down.


Tsachy Mishal said...

Well put JD.