from the rok boardSTOCKS
Short-sellers shift focus from banks to resources
PHIL WAHBA
Reuters
Globe and Mail
August 28, 2008
NEW YORK--Short interest dipped on the Nasdaq Stock Market and New YorkStockExchange in the first half of August, suggesting investors maythinkthe worst of the market downturn may be over.
In particular, investors cut short positions in financial shares,but increased their negative bets on some Canadian resources stocks,partly reflecting a recovery in bank shares and a drop in commodityprices in recent weeks.
Butsome of the decline in shorts on financial shares may havebeentriggered by the U.S. Securities and Exchange Commission'sintroductionof an emergency rule from July 21 to Aug. 12 requiringshort sellers topre-borrow stock in 19 major financial firms beforeexecuting a shorttrade.
From July 31 to Aug. 15, short interest fell 5.7 per cent on the Nasdaq and fell 2.8 per cent on the NYSE.
"Theshorts are becoming more bullish and are cashing out," saidDylanWetherill, president and founder of short interest trackingwebsiteShortSqueeze.com. "If the markets continue to improve, we'llsee thepace of buying accelerate."
Investors who sell securities"short" profit from betting that theywill fall. Short-sellers borrowshares and sell them, waiting for thestock to fall so they can buy themat a lower price, return them to thelender and pocket the difference.
Thisis the second two-week period in a row in which short interesthasfallen on both exchanges. Prior to the two most recent periods, theNYSEshort interest had not fallen since March, while the Nasdaq hadbeenholding steady or rising since April, according to bi-monthlydatareleased by the exchanges.
"It's looking as though their focus is changing away from financials," Mr. Wetherill said.
On the NYSE, four of the five largest increases in short positions were in resources companies. Short positions in Barrick Gold Corp. and Potash Corp. of Saskatchewan Inc. more than doubled, while they shot up 72 per cent in Yamana Gold Inc.
Meanwhile,short positions in several banks that had been the objectof the SECrestrictions fell dramatically. For example, short positionsin Washington Mutual Inc. fell nearly 80 per cent and in National City Corp. they dropped by more than 90 per cent.
According to Harry Strunk, a principal with Treflie CapitalManagement, major short sellers are having their best year since 2002,partlyon the back of gains from shorting financial stocks. They arenow waryof trying to repeat the feat given regulatory moves to rescueailingfinancial firms.
"They want to protect their profits," Mr.Strunk said. "They saw theFed backing financial stocks, and when youhave the Fed backingsomething, you don't fight it."
As ofAug. 15, short interest on the NYSE fell to about 17.8 billionsharesfrom 18.3 billion as of July 31. Short interest as of Aug. 15was equalto 4.66 per cent of the total shares outstanding on the NYSE,theexchange said.
On the Nasdaq, short interest fell to 10.15billion shares from10.76 billion as of July 31. The Nasdaq's shortratio, or the averagenumber of days it would take to cover theoutstanding short positions,climbed to 4.54 days from 4.42 in late July.