SHORT INTEREST CONSENSUS (Positive Consensus/Bear Market Indicator): Nobody Wants To Bet Against Stocks

How short selling works...it's not happening much these days, which indicates investors are very complacent about risk. Not good.

How short selling works...it's not happening much these days, which indicates investors are very complacent about risk. Not good.

How strong is the stock market these days? It is so strong that nobody, especially Smart Money People don’t want to take the other side of the trade and bet that it will go down.

“According to the Financial Times, drawing from research by Markit, hedge funds have been reducing their bearish bets to levels not seen since well before the collapse of Lehman Brothers in 2008, which ushered in the worst days of the financial crisis.

The research found that the percentage of outstanding shares in the S&P 500 that have been sold short stands at just 2 per cent, or the lowest level since Markit began collecting the data in 2006, the Times said. That's down from a high of 5.5 per cent.”

 It’s not just the US stock market. The European  Stoxx 600 index only has 2 percent short interest (i.e. people betting that the index will go down). The UK’s FTSE All-Share Index has a less than 1 percent short position.

The obvious explanation is that investors think that the economy is on the mend and greater gains are on the near-term horizon. It doesn’t hurt that the Federal Reserve is still printing and flooding money into the world economy.

 “The Times pointed out that David Einhorn of Greenlight Capital said recently that it is "dangerous to short stocks that have disconnected from traditional valuation methods," meaning that it has become impossible to target stocks that are expensive relative to things like earnings.”

 The fact that nobody thinks stocks will go down anytime soon, further adds to the complacency investors are showing towards risk. Risk just doesn’t factor into any decision making right now. This is usually dangerous and can set up for some painful surprises down the road.