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Will outstanding high short positions lead to short-term rally?

Whereas a few weeks ago, Wall Street was very positive about high tech companies, just recently and especially after disappointing results from contract manufacturer Jabil (JBL), semiconductor leader Intel (INTC), and software provider Veritas (VRTS), sentiment for high tech stocks and the NASDAQ has turned suddenly very negative.

Sunday, August 01 - 2004 at 14:15

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In fact, based on the outstanding short positions on the NASDAQ, a short-term rally should not be ruled out.

Each time short positions soar on the NASDAQ, such as was the case in 1994, 1998, 2003, and possibly now, a NASDAQ rally followed. However, this time could be different for the following reason.

Over the last three years, the hedge fund industry's assets have grown very rapidly with the result that today more than one trillion US dollars is managed by hedge funds.

Let us assume that hedge funds leverage their positions just two-to-one, which would be low leverage by most hedge fund standards. Still we would then talk about a hedge fund impact on the stock market of around two trillion US dollars.

Now, hedge funds take both long and short positions and frequently establish so called pair trades, whereby they buy some stocks, whose prospects and valuations appear relative attractive and short others, whose prospects appear relatively unattractive.

So, with the leverage in play of the hedge fund industry, and the hedge funds' strategy of holding at all times both long and short positions, it is possible that the high short positions will this time not necessarily trigger a strong rally.

High tech industry fundamentals remain poor and, therefore, we would use any strength as a selling opportunity.

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Dr Marc Faber
Sunday, August 01 - 2004 at 14:15 UAE local time (GMT+4)

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This Article was updated on Saturday, May 26 - 2007

Index : Dr. Marc Faber

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