Decline of short Interest in S&P 500 reinforces the conviction of bulls

By: Carl Hayes

Challenging the recent rally in stocks that has taken some by surprise and driven the markets higher in a surprisingly smooth ride, short interest in S&P 500 futures has been building up since May 2009. However, a survey by analysts has confirmed that for the time in months July has seen a net fall in short interest on S&P 500 futures largely as a result of a massive 92 percent fall in short bets on the stock of the government-controlled American International Group Inc., or as it is publicly known, AIG. Shorts in Assurant Inc, which provides health insurance for mobile housing units also fell, while stocks of Valero Energy Corp. saw a significant rise in short interest. Those interested in forex trading online, especially carry traders see these as encouraging developments for the future of the global markets.

By July 15, short interest in the main U.S. index stood at 9.98 billion shares. Still, the only industry group where short sellers were more cautious was financials where short interest fell by 7.1 percent. On the other hand, shorts against energy companies rose by 6.6 percent. All this point to a short seller profile that is still unconvinced by the great upward momentum in the market, and is sometimes caught in the wrong place at the wrong time with his pessimistic outlook.

Since the collapse of the secondary market for mortgage bonds, the U.S. real estate market has been in free fall, and the deteriorating conditions in there have been the cause of a global financial and economic slump, beginning in August 2007. Events in spring and summer of 2008 included the nationalization of a mortgage provider and bank run in the U.K., the forced sale of the venerable U.S. firm Bear Sterns, a huge oil bubble, along with central bank and government interventions on an unprecedented and previously unacceptable scale. While stock markets were slower to acknowledge the size and seriousness of the economic crisis at first, the September 2008 collapse of the firm Lehman Brothers intensified downward pressures which culminated in one of the most vicious bear markets in recent memory.

Traders are hoping that the recent positive momentum, confirmed by resurgent global economic activity, will result in a bull market which will save the U.S. and world economies from a powerful deflationary spiral, while analysts caution against being bearish in this market environment, and note that forex trading strategies need to take into account that market irrationalities can last longer than traders’ pockets.