S&P 500 Breaks to New Highs, Short Sellers Dropping Like Flies

After a 7 day consolidation, the S&P 500 broke above last week’s highs after yet another premarket melt up. Thus far today’s gains have been contained at roughly the same amount as the premarket surge… as was the case yesterday. Meaning much like the rally since March 2009, very little happens many days during the normal market hours and most of the gains happen overnight. Whatever the case the melt up with no relent continues, as the index surges toward strategists year end targets – only 115 points to go (less than 10%) to reach the popular pin the tail on the donkey figure for year end 2011 of S&P 1400. The break over S&P 1280 sets that as new floor and onward and upward we go.

Short sellers have been cowered as they are extinguished by the Federal Reserve’s plan to manipulate prices “higher than they otherwise would be”. In normal times this hodge podge of indicators (margin debt surging up, investor confidence off the charts, short sellers giving up, et al) would be a contrarian investors dream. But we don’t live in normal times as central bankers are backstopping every asset on earth – debt or equity. In the theater of the absurd yesterday a country with 200% debt to GDP (Japan) offered to provide funds to Europe’s bailout package. The grand shell game continues – but as Chuck Prince once said, we dance until the music stops. The addendum to that is “and then we wait for the next multi trillion program by the Fed to fix the music.”

Via Bloomberg:

Bets against the Standard & Poor’s 500 Index fell to a one-year low. Short interest on the S&P 500 dropped to 6.87 billion shares, or 3.9% of shares available for trading, as of Dec. 31, down 5.7% from two weeks earlier. It was the third straight period that S&P 500 short selling fell.

The benchmark measure of U.S. equities completed its sixth straight weekly gain on Jan. 7, the longest winning streak since April. The biggest two-year advance since the late 1990s has driven the S&P 500 to the highest level since Lehman Brothers Holdings Inc.’s 2008 collapse intensified the worst financial crisis since the Great Depression.

“Most investors can see that momentum is going forward and they are reducing this risk trade because the odds are not in their favor,” said Daniel Genter, president of RNC Genter Capital Management in Los Angeles, which oversees about $3.7 billion. “There’s a lack of volatility, which makes it tough to short on a daily basis, and the upward momentum means it’s a losing proposition to bet against stocks in the longer term.”
Lower Volatility

Confidence the global economic recovery will continue has helped reduce expectations of price swings in the stock market. The Chicago Board Options Exchange Volatility Index dropped to 15.45 on Dec. 22, down almost two-thirds from last year’s peak. The VIX, as the gauge is known, measures the cost of buying insurance against S&P 500 losses in the options market.

The S&P 500 rose 0.5 percent to 1,281.04 at 10:02 a.m. in New York, reaching the highest level since August 2008, as Well Fargo & Co. raised its rating for large banks on speculation Europe will step up measures to control its debt crisis and lenders will boost dividends. The VIX declined 3.3 percent to 16.33, the lowest since Dec. 22.

Bets against Adobe, the San Jose, California-based maker of graphic-design programs, sank 28 percent to 9.6 million, or 1.9 percent of shares available for trading. Short interest on CenturyLink, the Monroe, Louisiana-based operator that’s buying Qwest Communications International Inc., tumbled 13 percent to 28.4 million shares, or 9.4 percent of float.

Sears Holdings Corp. and First Solar Inc. are the most shorted stocks in the benchmark index for

U.S. equities. Short selling in Hoffman Estates, Illinois-based Sears, the largest U.S. department-store chain, is at 31 percent of float. For Tempe, Arizona-based First Solar, the world’s biggest maker of thin-film solar modules, it’s 29 percent.

U.S. stock exchanges release data on short selling, or the sale of borrowed stock with the hope of buying it back at a lower price, every two weeks.

About Mark Hanna 542 Articles

Affiliation: Hanna Capital, LLC

Mark Hanna is President and Owner of Hanna Capital, LLC, a registered investment advisory firm. Mark has been a follower of markets since the late 80s, with a focus on individual equities since the mid 90s. He has been a well known commentator in the financial blogosphere for the past 5 years, following a career in corpoporate finance and accounting. Mark attended the University of Michigan where he graduated with a degree in Economics.

As an avid reader, Market Montage is the personal blogging site for Mark to share his views on economics, markets, and the like. Occasional cynicism and wit shall be deployed in his postings.

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