Mike Panzner notes:
The short interest ratio (outstanding short positions dividided by average daily volume) for the Nasdaq-100 Index Tracking Stock ("QQQQ," or "Qubes") is at its lowest level since the 3-year old bull market began, a possible contrarian signal suggesting that the bears have thrown in the towel.
click for larger chart
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UPDATE: March 14, 2006 2:18pm
Yes, this is a longer term Bearish contrary indicator. Rallies very often get started via short covering rally — no shorts, less rally . . .
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UPDATE 2: March 18, 2006 10:16am
James Altucher throws the gauntlet down in his weekend Blog round up at Real Money:
"Barry, I’m going to test this hypothesis because I don’t think it’s true. Specifically your statement: "this [lower short interest] is a longer term Bearish contrary indicator. Rallies very often get started via short covering rally — no shorts, less rally."
Dinner on me if I’m wrong (unless you abhor the thought of having dinner with me)."
James, of course I don’t abhor the thought of dinner with you — you are good and interesting company.
My only concern is whether I will be in the mood for Italian (Hmmm, I’ve wanted to try Da Filippo or Fiamma) or Asian Cuisine (Mr. K’s is around the corner from my office) perhaps Steak (I’ve never been to Angelo and Maxie’s, and Bobby Van’s Steakhouse is in my building).
I’ll start thinking about other places that interest me . . .
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UPDATE 3: March 22, 2006 10:16am
The WSJ reports this morning that Short Interest Increases 2.1% On the Big Board
Short sales rose on the New York Stock Exchange, breaking three months of fewer
bearish bets, despite a slight rise in the stock market.For the monthly reporting period ended March 15, the number of
short-selling positions not yet closed out at the NYSE, including all issues,
rose 2.1% to 8,243,648,110 from mid-February.Market-wide, the short ratio, or number of days’ average volume
represented by the outstanding short positions at the exchange, rose to 5.1,
compared with 4.5.
Interesting comment over at Schaeffer Research which has been working on the same issue:
http://www.schaeffersresearch.com/commentary/observations.aspx?ID=15526&c=obsfeed
“The trust’s SOIR hit a new 52-week low on Friday with a reading of 0.91. The last time the SOIR was this low was in August 2004, which was a good time to be long the QQQQ. It wasn’t quite as low in April 2005, but it was close, and the QQQQ rallied nicely over the next few months. ”
why did the markets not get beat up on the pop in oil today??? Is that a sign of underlying near term strength???
stocks are positively correlated with oil not negatively. this is a big misconception driven by pundits on tv. high oil is bad for the economy but not bad for stocks or more importantly multiples. the transports which are obviously the most exposed to higher oil prices have rallied along with oil. falling oil prices are a reflection of tight credit which is the same thing keeping a lid on QQQQ.
stock investors should be concerned if oil breaks down below $50.
There is no correlation between stocks and the price of oil. It’s all a big lie created by “analysts” who dont understand markets and make something up to justify reasons why markets go up/down.
Transports dominant move throughout this cycle is because rails have a 5x, or whatever it is, cost advantage over alternative shipping methods when oil is this high. To add to the situation, there is a trucker shortage, so trucking companies have two reasons to load their trailers on rails. In an odd way, that labor shortage likely helped trucking company earnings. In addition, many of the logistics companies were able to pass along price increases to clients as their business to and fro Asia and within the US soared on economic expansion. The positive correlation to the Transports and oil is a temporary phenomenon that will be broken at some point when oil heads much higher or much lower or the market craters or commodities crater or whatever. Might be months, might be years but it will be broken. So, on the surface the Transports moves look illogical but they are anything but.
And there surely is a correlation to the markets and oil. Doing a regression analysis will show this as a mathematical fact not as opinion. Since the oil related stocks account for a significant amount of S&P earnings this cycle, how could it not have a positive correlation? If you don’t have the ability to do a regression analysis look at a comparison chart. Overlay the S&P on Oil or the Oil Service Index or the Amex Oil Index.
The Q’s short ratio being so low at an all time high may be pointing to overly bullish sentiment. I believe that is what Barry meant. Schaeffer’s commentary is noteworthy but is done in a vacuum without looking at other data. Example: 2004 was a very bad year until the August low. As the Q’s dropped throughout the year on lower highs into a significant correction, $39 to $32, the short ratio dropped with price.
Point in time data may or may not be valuable. This market cannot make up its mind. That is the sign of a top. Every time. I’m not Paul Desmond but I’ve studied every major bottom in the twentieth century post 1928 and this is not a launch pad for a major move. Especially one like August of 04. And, usually, the longer the fiddle farting around, the more important the top. We’ve been fiddle farting since late November. There are alot of people skittish but I think most hedge funds are really long funds in disguise because most people don’t know how to or feel comfortable shorting. That goes for professionals as well as individuals. And those funds are likely very leveraged LONG. Fund managers have loaded up to the gills with stocks as I see data. And, a proprietary market breadth indicator I use is at the highest level since 1998. Unbelievably, even though we have sold off a little since January, it is still stuck in the stratosphere showing tremendous bullish behavior in the market regardless of what sentiment surveys say. A little bit of mom saying, do as I say not as I do. ie, I’m very nervous as read in the surveys but loaded to the gills in equities. Ala 2000.
Look at a crude oil chart and a chart on the Nas , SP and Dow. They follow in tandem….why?, because it’s in vogue (cycle). Next month or next year it will be somthing else trailing or leading the market. Just look at history.
To predict market direction and trade accordingly is a mistake (unless you’re Sylvia Browne!) let the market make the first move, then trade with vigilance.
Currently i’m on the sidelines, and i’m a short term trader. I haven’t seen this kind of complacency and quandary since March 2000.
If you trade off Schaffer’s option analysis, you must be a very poor man (or woman) indeed. The guy is wrong 75% of the time. Seems like a decent guy, but relying on a couple of arcane indicators to determine whether a stock is bullish or bearish is risky and foolish. And in Schaeffer’s case, nearly always wrong.
Gawd,
I like the CNBC crew but………..Every friggin industry is up today and Pisani is all over himself. Oh, and the Vix is flirting with 9 again. The home builders peaked up 3.5% and looks to be the leading index. Now, I’m not a bubble predictor but a slow down is definitely in the works so why are home builders up? Because ten year T interest rates are down.
This efficient market theory stuff is hilarious. Short term money is pushing the string around. Btw, doesn’t Sylvia Browne work for Goldman? Or is that Morgan Stanley? I just saw many incarnations of her on CNBC today.
Traders go broke every year attempting to trade a correlation between stocks/oil. After millions of dollars are donated to Mr. Market they realise what the rest of us already know. Theres no correlation between stocks and oil.
similar to what tonythetiger said, oil is correlated with stocks because this recent cycle (actually since the 3/03 low) is driven by liquidity which is affecting all asset classes the same. they may see different peaks and troughs but the general trend is the same. today’s session was classic example. oil rallies, gold rallies, bonds rally, stocks rally, google rallies. the assets that have been under pressure due to tightening of liquidy were the leaders. today the multiple expansion trade was back after a 2 month hiatus but i doubt it lasts.
i agree w/B on the transport point on the competition and capacity which they slashed after 9/11 but i also think of our trade deficit and the fact that most of our consumption is import related. all those imports from CA have to trucked across the country to all those walmarts. and our consumption is based on the liquidity being pumped into the economy (via home equity loans and 0% financing on electronics). so the same forces driving up oil are driving up consumption which has been great for transports, which should provide a great short opportunity as protectionism grows and the savings rate rises.
like i said before if oil breaks down it will be back for stocks not good.. Pissanni won’t be able to figure it out and he will be whining to Maria about why the markets aren’t “behaving” correctly.. there is no correctly. it is what it is. right now it is correlated
I guess Bobby’s mom held him out of math class. Oil/Stocks is highly correlated and there are a few comments on here that actually explain it for the math deficient.
“If you trade off Schaffer’s option analysis, you must be a very poor man”
I don’t trade off of it – but I thought it was interesting to see the contrary opinions on the issue.