Tuesday, July 14, 2015

Stock Market: Why The Short Sellers Will Lose Again

(Drivebycuriosity) - Short sales are at their highest level since the financial crisis, reports Bloomberg (bloomberg). Short sales are bets on falling stock prices. Short sellers borrow stocks from a broker and sell the shares immediately in the hope that stock prices will fall and then they could buy back these stocks for much less.

The high number of short sales reflects a lot of ignorance and economic illiteracy. Short sellers are betting against the odds. Since its start in the year 1896 the Dow Jones (an indicator for the whole stock market) climbed on average around 7% annually. This makes an average plus of around 0.02% a day. Yes, this is a marginal number, but any plus is a loss for the short seller and even stagnating prices lead to a loss because of the fees and the transaction costs. Hence short selling means betting against the long term trend of rising stock prices. Stocks gained more than 200% since the end of the financial crises in 2009 -  translating into huge losses for the short sellers.

Short sellers are also betting against the current positive economic trend. The US economy is getting stronger, company profits are rising, oil and other commodity prices are subdued and the Federal Reserve signaled that they will hike interest rates only gradually. The risk of falling stock prices, against the long term trend, is low.

The high numbers of short sales is good for the stock markets. All short sales have to be covered, therefore the short sellers have to buy the sold stocks some times back to clear their positions. This purchases will give additional headwinds for the stock market. The short sales are a signal that many are way too pessimistic and that the market is far away from the euphoria of the late 1990s which lead into a crash. I assume that the short sellers will lose again.

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