Bearish hedge fund bets may send U.S. stocks lower: BofA analyst

Bearish hedge fund bets may send U.S. stocks lower: BofA analyst
U.S. stocks are likely to extend declines because hedge funds have leeway to boost bets against the world's largest equity market, according to Bank of America Corp.'s Mary Ann Bartels.
SEP 04, 2011
U.S. stocks are likely to extend declines because hedge funds have leeway to boost bets against the world's largest equity market, according to Bank of America Corp.'s Mary Ann Bartels. “We still believe that hedge funds have the ability to significantly short the market,” said Bartels, head of technical and market analysis in New York. “It's a bearish signal, absolutely.” The adjusted short interest ratio, a measure of potential buying pressure, is 1.5 for the Standard & Poor's 1500 Composite, down from 2.4 at the end of July and below its 10- year average of 2.4, Bartels wrote in a report dated Sept 5. While short interest on U.S. equities rose in August, trading volume surged, pushing down the short interest ratio and lowering the number of trading days it would take to cover all short positions in a stock or index. “Short interest represents a floor,” said Bartels, who ranked third among analysts who study price charts in Institutional Investor's 2010 survey. “If you have a lot of shorts, you only fall so much, and we don't have that floor, we don't have a safety net on the market.” The proportion of S&P 500 shares outstanding sold short rose to the highest level since the end of November last week, climbing to 3.03 percent on Aug. 29 from 2.37 percent at the beginning of August, according to New York-based Data Explorers, which provides research on short sales and stock lending. Short selling of the gauge reached a three-year high of 5.52 percent in August 2008. Net Short Hedge funds and other large speculators were net short 107,913 S&P 500 Index futures contracts in the week ended Aug. 30, wagering that the benchmark will decrease in value, according to data compiled by Bloomberg and the U.S. Commodity Futures Trading Commission. The position is the highest since September 2007, when bearish bets reached a record 127,474 contracts a month before the benchmark equity gauge peaked at an all-time high, Bloomberg data going back to 1997 show. “What we're most concerned about is the banking system in Europe,” Bartels said. “There is no reason to have a very long position with the positioning of the charts,” she said. Still, “the level of shorts is nowhere near where we saw in 2008 and 2009” in terms of potential buying pressure. Stocks fell yesterday, giving the S&P 500 its longest slump in almost a month, amid concern that Europe's debt crisis is worsening. The benchmark gauge for U.S. equities lost as much as 13 percent last month before trimming its retreat to 5.7 percent after the Federal Reserve said it will act to spur growth. --Bloomberg News--

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