Tuesday, March 15, 2011

Stock Market: Bettings Against The Vultures?

The stock market is under pressure. Stocks in Europe & USA are tanking, following the catastrophe and resulting market crash in Tokyo. Fears about economic fallout from the endangered Japanese nuclear plants are spooking investors.

As usual in such situations vultures are circling above the market. Many hedge funds and other market participants are shorting now massively. This means that they are borrowing lots of stocks and other risky assets (like oil) and throwing them on the market. They are betting on much lower market prices, which would enable them to buy those assets back at significantly cheaper price, therefore gaining a huge profit.

The massive selling of the "shorts" enhances the stock market fall. The experience from the past (for example 9/11 and the panic of March 2008) shows that the short sellers very often overdo it, because too many are making pessimistic bets. History also proves that the global markets are much more robust than the way pessimists think. The current stock market slide could therefore be an overreaction which generates way undervalued stock prices. Is this is a big occasion to buy?

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