We have some fascinating cross currents as this era of never seen before central bank intervention is creating new paradigms. The 10 year U.S. bond continues to have an incredible bid underneath it as yields plummet, which normally points to extreme caution and recession ahead. Economic data has been poor (and worsening) for months – yesterday we had the 3rd month of decline in retail sales, which is rare to see. Yet the market holds up in the face of this as the belief in omnipresent powers by central banks has investors not wanting to be sidelined in case they miss another "QE rally". Certainly many traditional relationships have been skewed.
As always, trying to look at both sides of the picture – even as the U.S. market holds up decently, NYSE short interest has surpassed the peak in 2011, which happened in September. For a contrarian that would be a net positive. Or will the herd actually be correct this time?
- Short sales on the New York Stock Exchange have climbed above last September's peak, a level that preceded a five-month rally and heralded losses for bears. Shares borrowed and sold reached 5.35 percent of stock available for trading last month, according to data compiled by NYSE Euronext. That eclipses 5.28 percent on Sept. 15, when bearish bets peaked last year and the 25 most-shorted companies in the Standard & Poor's 500 Index (SPX) began a 21 percent advance.
- Investors speculating on declines have pushed up short sales each of the last two years only to see the trades fizzle as actions by central banks helped stoke rallies. Bulls say the same thing will happen in 2012 as European leaders work to contain the debt crisis and companies beat earnings projections for a 14th straight quarter. For bears, slowing economies from China to Germany mean the bets will finally pay off.
- Investors making bearish bets in September suffered as stocks such as PulteGroup Inc. and Whirlpool Corp. (WHR) with the highest short interest rallied 21 percent on average through April 2, 2012.
- Short sales are climbing while another measure of investor concern holds below its historical average. The Chicago Board Options Exchange Volatility Index (VIX), derived from prices to protect against losses in S&P 500 shares, has declined 28 percent this year to 16.74 and hasn't exceeded 20 since June 25.
Any securities mentioned on this page are not held by the author in his personal portfolio. Securities mentioned may or may not be held by the author in the mutual fund he manages, the Paladin Long Short Fund (PALFX). For a list of the aforementioned fund's holdings at the end of the prior quarter, visit the Paladin Funds website at http://www.paladinfunds.com/holdings/blog