Friday, December 31, 2010

NYSE Short Interest VS SPX

Short interest on the NYSE has moved down considerably the past few months.  It appears much of the rise in risk assets has been more shorts covering positions versus new long positions entering the market.   The question then becomes as we enter 2011 who is left to bid this market higher?  Shorts for the most part have capitulated while markets have seen record outflows from equity funds.  Sentiment surveys (AAII and Investor Intelligence) have all been reading multi year highs from % Bullish to Bull Bear spreads.  Simply translated, pretty much everyone is "all in."  Additionally with the VIX at the lows of the year and the margin debt at LEH highs selling in the face of any shock to the system could be greater than most anticipate.

Looking at this chart also confirms one simple truth.  The market always fades the group think trade.


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