Short selling rose 3.66% on the NYSE over the past month –to yet another record level! We often point out that record levels of short interest have no more import than do record levels of overall trading volume. In fact, the NYSE reports that the NYSE short ratio fell from 6.1 to 5.9 “days to cover.” Unlocking the stock market potential of squeezable shorts requires the proper price action. The market needs advancing prices to put the squeeze on short positions. The rub is that seasonality now begins a period of extreme negativity that lasts into mid-October. Seasonality does not cause a market move, it simply reflects tendencies.
The above chart shows seasonal and choppiness indicators for the NASDAQ 100 index. Seasonal heat (see circles in chart) gets bright red when in past years seasonal cycles are consistently weak. Bright green highlights periods of consistently positive seasonal cycles. We have just ended a brief August period of positive seasonal heat. The yellow arrows highlight the late August-to-October period when the seasonal cycle declines and there is no positive seasonal heat.
Choppiness is in decline, which is another way of saying a trend is underway. The trend is up and has yet to mature. A mature trend is delineated by a choppiness reading below 40. The current reading is 45.
The EBB (Erlanger Big Barf) indicator measures the momentum of the VIX relative to the momentum of the S&P 100 Index. The higher the EBB, the more bullish are option traders. Extremes are often turning points, and we especially pay attention to divergences relative to price action (see trendlines in above chart.) The rally started in July with a veritable explosion in the EBB as it soared to a rarified level of 15. A hard test of that breakout followed. The market has again rallied to a higher reaction high with last week’s action – but these recent highs remain unconfirmed by the EBB. While a move back below the “zero” line would be confirmation that the rally/uptrend is over, it remains above zero. The most bullish thing the EBB can do here is to move to a reaction high – that means it must move above 8.50 (the blue line in the above chart.)
What would be a big positive for the market would be continued relative strength in technology stocks into October – that would be a great setup for a more sustainable advance into 2007. For now, we need to get past the September and early October seasonal period of angst. Stay tuned.