I Don't Like The Short Side

While a pullback would not be surprising after the strong rally we have seen, I believe it is very dangerous to be short. Investors have de-risked and corporations are buying back shares at a torrid pace.

  • The ISI hedge fund survey shows hedge fund net exposure at the lowest level since 2009.

  • Individuals have been redeeming money from mutual funds, with $40 billion taken out in a single week.

  • Rydex traders are positioned bearishly.

  • The COT report shows speculators are net  short the indexes.

Market participants as a group have low exposure to the market. At the same time we are seeing numerous share repurchase announcements on a daily basis.  If corporate buying can goose the market we can see a performance chase develop. Barring a systemic collapse this market is likely headed higher. While an extremely unbalanced World makes a systemic collapse a possibility, it is a tough bet to make.



frank r said...

The long side isn't that attractive either. When you buy stock, you are buying part ownership in an infinite lifespan business. At current dividend plus net buyback rates, most of your money will be received well into the future. Is there a margin of safety at today's prices for all the things that could go wrong? I can think of a lot of things that could go wrong, and thus a lot of reasons for the margin to demand a higher risk premium (lower PEs).

I'm tempted to move back into stocks (I moved to bonds in april 2010 or thereabouts and wasn't able to get back into stocks during last summer's slump due to traveling), based purely on sentiment. Then again, something tells me I'm moving too soon. The momentum is down.


Tsachy Mishal said...

The market may or may not be cheap, depending on how profit margins hold up. That does not mean there are not cheap stocks.

frank r said...

Moved 20% into stock indexes at under 1160 on the SP500. Not a great price, but less than what I sold for back in april 2010 plus I did quite nicely on the bonds since then, so those gains provide some cushion in case I'm overpaying.

Yes, given current profits and current bond yields, stocks are clearly the better choice compared to bonds. But treacherous waters lie ahead and, as I noted above, stocks are perpetuities. A lot could go wrong in the decades ahead: higher real rates, lower profit margins, higher corporate/dividend/capgain taxes. Stocks could adjust violently downwards in reaction to such changes.

Now I have to worry about the remaining 80% still in bonds...

Massive Short Squeeze possible said...

[...] week I wrote how I do not like the short side. The recent short interest numbers add to my weariness of the short side. The following chart is [...]