As you may know, short-selling a stock means that a speculator is betting that the price will go down.
This is a lot riskier than taking a “long” position in a stock — or, betting that the price will go up.
The reason why is that the most a speculator can lose by going long is 100% of his investment — say, if a company goes out of business. However, the losses a short-seller can suffer is potentially unlimited, in other words, short-sellers can lose way more than their initial investment.
As a case in point, a November 2015 Marketwatch article noted that …
… an investor placed a $37,000 short position on [a micro-cap pharmaceutical firm] earlier this month, only to find out a day later that the shares had shot up about 800%.
However, despite the high risk, there are speculators who elect to play the short side.
Recently, however, their ranks have been dramatically dwindling, given the strong stock market rally since the March low.
Indeed, here’s an August 21 Bloomberg headline:
Bears Are Going Extinct
Our September Elliott Wave Financial Forecast showed this chart and noted:
The story under the Bloomberg headline features Goldman Sachs’ data on the short interest in the median S&P 500 stock, which fell to just 1.8% of market capitalization in early August. As the chart shows, this is easily the lowest wager against rising S&P prices in the 16-year history of the data. “Skeptics are a dying breed in American equities,” concluded Bloomberg.
What should market participants make of this extraordinarily low short interest in stocks?
Well, financial history shows that when bears become few and far between, it’s time for the bulls to start worrying. The same applies when the bulls become few and far between.
In other words, sentiment extremes often correlate with trend changes.
Having said that, it’s best to use sentiment measures in conjunction with the Elliott wave model.
When the two are sending the same message, an investor can arrive at a high-confidence market forecast.
Get insights into the stock market’s Elliott wave pattern as you follow the link below.