- Money Morning Australia

The Other Side of Short Selling

Written on 14 September 2011 by Aaron Tyrrell

The Other Side of Short Selling

In Europe… France, Italy and Spain have extended bans on short selling. While Belgium set ‘an indefinite ban’ on short selling two weeks ago.

The countries are worried that ‘bearish’ short-seller sentiment will drag their stock markets down.

They’re already at a two-year low…

The German DAX Index 13 September 2009-11
The German DAX Index 13 September 2009-11
Click here to enlarge
Source: Yahoo Finance

The five euro stock indexes we looked at this morning were up yesterday. But the ban on short selling hasn’t stopped volatility.

The DAX traded in a 5% range yesterday. The FTSEMIB (Italy) did the same. So did the CAC 40 (France)… The IBEX 35 (Spain) was slightly less volatile… It traded in a 4% range… And the BEL 20 (Belgium) moved in a 6% range…

Those are big price swings.

But banning short selling won’t stop the stock market falling. And it won’t stop volatility. In fact, it could make things worse.

Because what short sellers do, under normal conditions, is borrow stocks they think will fall and then – when they have fallen enough to take profit or risen too high to take the risk – buy them back.

That buying – called ‘covering’ – helps cushion the blow of a massive stock market plunge.

But no short sellers… No cushion.

Forcing traders to ‘only make money from stocks that go up’ is like forcing someone to climb a ladder and yanking it out from under them when they reach the top rung.

But for now, there aren’t any restrictions for short sellers in America. And it shows…

From Zero Hedge.

‘In the second half of August evil “speculators” did not relent in their negative bias, and brought the total NYSE Group short interest to a two year high or 14.9 billion shares, a 484 million share increase from the prior week, and the highest since July 2009…’

That means there are 14.9 billion individual shares that need to be covered. Do you see how this works? Sure, the short-sellers may have pushed the market down. But even a tiny whiff of good news from the next Federal Open Market Committee meeting could see the market rally from a ‘short squeeze’.

This is where short-sellers buy stocks to close their positions (sometimes they’re forced to as the market rises quickly). This creates buying pressure and can cushion the market from further falls.

The two-day meeting of the FOMC is only a week away. And because no-one knows for sure what the Fed will do, there’s a chance short sellers will cover their trades… and that means stocks could rally over the next week.

Short Interest (bar graph) vs SPY Close (red line)…
Short Interest (bar graph) vs SPY Close (red line)


Aaron Tyrrell
Editor, Money Morning

P.S. Slipstream Trader Murray Dawes feels the ASX may be on the verge of a squeeze. In his new free video market update, Murray will take you through what’s happened in our market recently and where he thinks it will head. To view the video, simply click here to visit Slipstream Trader YouTube channel.


Related Articles

Short Sell This Economic Empire Today

Is The China Boom Rumour or Fact for Aussie Stocks?

The Madness of Mad Men

Why I’m Flying the Flag for China

Learning Economics from a Pencil

From the Archives…

HarveyNormanomics in One Lesson
2011-09-09 – Kris Sayce

When Nine Gold Stocks Just isn’t Enough
2011-09-08 – Kris Sayce & Dr. Alex Cowie

Manipulation on a Grand Scale
2011-09-07 – Kris Sayce

Three Steps to Wealth: Leverage, Volatility and Risk
2011-09-06 – Kris Sayce

Why it’s Not Too Late to Avoid This Investing Mistake
2011-09-05 – Kris Sayce

For editorial enquiries and feedback, email moneymorning@moneymorning.com.au

Already a subscriber to Money Morning... or simply, just like what you're reading? Then show your support and spread the word...
Share this post on...

Leave a Comment

Letters will be edited for clarity, punctuation, spelling and length. Abusive or off-topic comments will not be posted. We will not post all comments.

If you would prefer to email the editor, you can do so by sending an email to moneymorning@moneymorning.com.au

How Money Morning Can Help You Can Become a Smarter, Better, Investor

Privacy Statement
We will collect and handle your personal information in accordance with our Privacy Policy.
You can cancel your subscription at any time

New Frontier Investor

The last investment megatrend birthed stock gains of 11,095%, 20,621% and 50,760% over 20 to 40 years.

If Kris Sayce is right, gains from this next megatrend won’t just reach those heights...

They’ll SURPASS them...

To see why, click here.

Iron ore leadgen

Stock Market Updates

  • ^NDX3961.623+27.487 - +0.70%
  • ^FTSE6795.34+66.90 - +0.99%
  • ^AORD5553.600+19.600 - +0.35%
  • ^AXJO5563.100+19.800 - +0.36%
  • AUDUSD=X0.9387
  • USDJPY=X101.525

The Denning Report

‘The era when the US was a
superpower has ended. We need
to protect ourselves’

Japanese Politician Takaya Muto

A quiet war in the Pacific has begun. The key combatants are the US, China and Japan. And WE are trapped in the crossfire.

In this brand new special report Dan Denning details three reasons why Australia is losing control of its future...and a three-part investment strategy you can use to protect your wealth and PROFIT


interest rates leadgen

Australian Small-Cap Investigator

Why Holden’s future lies
beneath the soil in

And not just the future of Holden…but Toyota,
Hyundai and Mazda too


investing success leadgen

Phil Anderson Cycles, Trends and Forecasts

‘This man can see the future…’

In 2003, when America was at war and CNN was warning of a ‘double-dip recession’, he was buying small cap stocks right at the bottom...

Also in 2003, Australian newspapers were full of headlines warning of a looming property crash, he said nonsense, and that Australian property would boom for years to come...

In 2011, when everyone thought the euro was history, he said ‘the euro is not going to collapse... Greece will NEVER be permitted to default...’

Simply: this man can see things others can’t.

To find out who he is, and what he’s forecasting right now, click here.

Resource Sector leadgen

Gowdie Family Wealth

Which type of family are you?

  1. The kind that ends up in court
    battling over inheritance money…

  2. Or the kind that knows how to
    protect, pass on and grow wealth forever.

Click here if you want the kind of family
that grows its wealth for generations.

Diggers and Drillers [BANNER]

The Money For Life Letter

A giant wrecking ball is about to smash Australia’s retirement system to smithereens...
And unless you take the evasive action outlined in this Special Issue, everything you’ve saved and invested over your whole working life could soon be GROUND to DUST.
Click here to read.

Gold Stock leadgen

Revolutionary Tech Investor


You decide to buy a share on the stock market.

The company, on face value, is run by lunatics.

Their business plan is madness.

It's only 48 cents. What the hell?

You whack ten grand into it.

Ten years later that $10k is worth just shy of

Welcome to the Moon-Shot Club!

Graphic Ad 1 – Blue Chip Stocks Report

More Recommended Reading Below...

The Pursuit of Happiness & The Daily Reckoning

  • The Pursuit of Happiness
  • The Daily Reckoning Australia

Russia and its supporters have nothing to gain from attacking civilians. Russia and Putin were winni [Read More...]

You owe it to yourself take this advice. But even if I’m right and you act now, you may not be able [Read More...]

New Zealand may not be an emerging market, but it’s highly leveraged to growth in emerging markets. [Read More...]

Clearly, illegal immigrants are a headache for the government. But rather than store them on Christm [Read More...]

Don’t fear the swan. But don’t be complacent either. Acknowledge and respect that black swan events [Read More...]

The world is a safe, stable place. Must be. Janet Yellen says so. The bond market says so. The stock [Read More...]

Into this swirling maelstrom of confusion, you’ll be invited to board a new investment vehicle next [Read More...]

Russia and its supporters have nothing to gain from attacking civilians. Russia and Putin were winni [Read More...]

This morning the Australian dollar is trading for 93.9 US cents. It hasn't managed to regain pa [Read More...]

While Australian investors continue to hold most of their share investments in local stocks, they ar [Read More...]


"I think you're fantastic! I love to read what you write...you're so interesting and amusing and I've learned so much" -
Money Morning reader, Chris Gadd

"You guys are brilliant. I feel more relaxed about the future than ever simply because I know what is going on rather than floundering around with smoke screens and mirrors from the government and mainstream" -
Money Morning reader, Helen Carter

"Wow what can I say? I was an economically confused moron until I read your newsletter and even though I've been a subscriber for a short period I can now see how easy it is to understand, if you use common sense and can have the spin translated into everyday language. Thanks for an entertaining read." -
Money Morning reader, John

"Keep up the good independent and well thought out articles offering a view that often debunks mainstream myths." -
Money Morning reader, Craig

"I do admire your straight talking and simple analysis of the situation, I think of you as the Jeremy Clarkson of finance." -
Money Morning reader, Jeffery