- 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...
Share

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 value your privacy. We will not sell, rent, or share your email address with any third party. Read our Privacy Policy here.

Diggers and Drillers

A 3-Point Plan to Re-Engage with the Aussie Mining Boom


This new video reveals a way for Aussie share investors like you to RE-ENGAGE with the next phase of the mining boom…while valuations are still dirt-cheap…


The plan centres round three specific stocks.


To find out what they are, click here.

Australian Small-Cap Investigator

The Australian wildcatter
exploring oil's 'final frontier'


The US Geological Survey says this area contains up to 71 billion barrels of oil.

Only a few explorers have secured licences to drill.

One of them is a daring little Aussie firm that begins drilling 'in early 2014'.

According to small-cap analysts Tim Dohrmann it's impossible to speculate just how high this one could go. Find out why here.

World War D

Couldn’t make it to our
‘War Summit’?


Don’t sweat it. Click here for the next best thing…


World War D was the most important meeting of minds of the decade so far. What came out of it will almost certainly force you to reshape your investment plan for the rest of the decade. There's no way to go back in time and get inside the Savoy Ballroom of the Grand Hyatt.

But you can do the next best thing…
to find out what it is, click here.

  • ^NDX3557.036-31.769 - -0.89%
  • ^FTSE6674.74-7.02 - -0.11%
  • ^AORD5520.500+18.300 - +0.33%
  • ^AXJO5536.400+18.600 - +0.34%
  • AUDUSD=X0.9293
  • USDJPY=X102.525

Graphic Ad 1 – Blue Chip Stocks Report


Revolutionary Tech Investor

This report is about TECH MOON-SHOTS


Four of them, to be precise.


It's an early-days project. But one biotech aiming for the cancer moon-shot is already up - get this - 497.14% since tipped.


For four more tech moon-shots, click here.

Gowdie Family Wealth

WARNING:
The worst mistake you can make when handing wealth on to your kids


This brand new investor briefing shows you what your family’s in for if you don’t take care to leave your wealth to them in exactly the right way.


And it shows you precisely how to prevent infighting, recklessness and misunderstanding over money.


Read it here.

The Money For Life Letter

Holden. Toyota. Qantas. BUST


Do you really expect the share market to boom in times like these? That's why Nick Hubble says the best thing you can do right now is invest for safety and income.


This brand new video shows you how you can get predictable, reliable and rock solid cash flow no matter what happens in the wider economy.


You could lock in up to $20,000 a year - and that's just the start. See how here.



Sound Money. Sound Investments. [bullish prediction]

Greg Canavan's first bullish prediction in four years


Greg Canavan
doesn't make forecasts like this often.


When he does, it's because he’s found something that could make you money for years to come.


Read more here.

Is the Australian Housing Boom Really Back?

The Denning Report

2014 Predicted


Dan Denning accurately forecast 2013's flight from
bonds to stocks, the commodities crash and the
Aussie dollar top…to the exact week


In this brand new forecast report, he shares his
three critical predictions for 2014…

More Recommended Reading Below...

The Pursuit of Happiness & The Daily Reckoning

  • The Pursuit of Happiness
  • The Daily Reckoning Australia

Two days from now Australia will get a taste for what happens in American sports stadiums every day [Read More...]

Would you approve this chemical? Would you allow this to come to market? Table salt would simply not [Read More...]

If these lessons can be passed onto the next generation, what a world it would be. Healthier, genuin [Read More...]

3D printing is changing medicine, consumer products, art and manufacturing. The impact it’s having o [Read More...]

Done properly, a retirement business can not only help fill a retiree’s time and replace their work [Read More...]

It was necessary just to stay in the same place. Take it away, the US stock market crashes...and the [Read More...]

The end of Australia’s recession-less run is waiting somewhere. Even the US is due for another reces [Read More...]

You can see the property cycle and how it moves and turns, all around you. Get used to it. Australia [Read More...]

A high Australian dollar means we’re doing well at exporting. A low one means our trade balance is l [Read More...]

From the invasion of the Philippines to the Vietnam War…the US empire was financed by the rich, prod [Read More...]

TESTIMONIALS

"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