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Short interest data mixed in December

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What are they thinking?

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Short interest for the period between mid-November and mid-December was mixed for the two major markets. The NASDAQ broke a two-month slide in short interest, posting a 71M share rise (about 1.4%). NYSE short interest declined for the second month in a row, dropping about 112M shares (about 1.4%). Prices of composite indexes for both exchanges rose during the same period

As you may recall, I am of the opinion there is a short bubble in the market. So many people are leaning on stocks for so many reasons that the potential for a breakaway upside move fueled by short covering is real. I will note, however, that just as the "bubble" on the bull side went longer than many contrarians expected, this bubble may continue to expand beyond what the bulls think reasonable.

In my "Telescope" article earlier in the month, I argued that the current macro-market bear case would not be the cause of the equity pullback, but the result. A persistent decline in stock market values caused by some exogenous event would trigger the "doomsday scenarios" to pile on, making the decline much worse.

One could argue rising short interest levels make it less likely the decline in the market would trigger the doomsday scenarios. While I'd like to whole-heartedly endorse that line of thinking, I'm not certain it is correct.

I do believe the costs associated with holding a short position will become increasingly uncomfortable in 2005. In some ways, this short bubble is Hoofy's own doomsday scenario - a scenario that spells doom for Boo's camp. A sustained rise in the market would be "exacerbated" (fueled) by the popping of the short bubble. As many Minyans are aware, I've been expecting this short bubble to matter for some time now. Perhaps the same logic I applied in my Telescope piece works here: The bursting of the short bubble will not be the cause of an equity acceleration, but the result.

That works for me, too.

Back in my home sector, of the 23 companies in our coverage universe, 12 saw their short interest decline. Short interest in the IBB, the iShare ETF for the NASDAQ Biotech Index, dropped 1.2%. The BBH, a HOLDr ETF approximating the AMEX Biotech Index, saw short interest drop 22.38%.

No positions in stocks mentioned.

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