By MoneyMorning.com.au
Slipstream Trader, Murray Dawes 7 October 2011
Is Murray right?
Could be. A leading bearish indicator – we’ll show you in a minute – has reached a five year peak. When bearish indicators peak it suggests stocks could be heading for a fall.
This shouldn’t come as a surprise.
Since the April highs of this year, the Dow Jones Industrial Average has lost more than 6%. The S&P 500 is 8% worse off. And the S&P/ASX 200 is down more than 11%.
Data compiled for Bloomberg News showed ‘borrowed shares’ rose to 11.6% in September, almost 2% higher than July.
This is important because in order for short sellers to short sell, they must first borrow the shares. So knowing the amount of borrowed shares gives a good guide to how much stock is being short sold.
That should be enough to alarm the bulls. Because the larger the amount of short selling, the more ‘bearish’ the market outlook.
To put it in perspective, the 2% increase in short selling is the biggest increase since 2006. Bloomberg’s report found ‘US short sales are rising at the second-fastest pace on record after the 2008 financial crisis.’
And according to the New York Stock Exchange, short selling has jumped from 3.5% in July to 4.1%.
So, which way is the market headed?
Filippo Garbarino, a managing director at Frontwave Capital says, ‘The market is so undervalued right now, it’s kind of hard to take a short position. But at the same time given the economy, it is hard to be long’.
And then there’s this from Eden Chen, at Lightmark Capital, ‘It’s very difficult to say with certainty whether being long or short right now is a good idea because things can quickly change.’
In other words, they don’t know!
Anyone can see the market is trending down. But what you want to know is what you should do about it?
Technical analyst, Murray Dawes, has been wary of the lack of market direction.
When discussing the technical aspects of the S&P 500, in his free weekly market update, Murray warned that if ‘…there’s a quick sell off from back under the 10-day moving average… we can get bearish again. But right now the market is holding well up above that 10-day moving average, it’s in a short-term uptrend.’
He added, ‘A move back under… 1230, that would be the area that I’m looking to enter with my short [trades]. That would be the perfect trading opportunity. Where we are right now is a bit of no man’s land.’
As for the ASX200, he says it could move higher. But don’t expect it to last long.
Murray says:
‘Last week I was saying that there was a chance that if the market did take off to the upside we could see even a move back up to the 200 moving average which is up around 4450…
‘[But] we have to be a little wary that the shift in momentum in the last week or two has been quite dramatic. This could carry on for a bit longer before falling over.’
In other words, this is a traders’ market… and a volatile market.
And that means there are plenty of opportunities to trade the market long or short.
Shae.
Editor, Money Weekend
P.S. To check out Murray’s latest free weekly market update on YouTube, click here…
