It's a tale of two markets.
#-ad_banner-#Value stocks, which are well represented in the
Dow Jones Industrial Average and S&P 500 Index remain near
all-time highs, while growth stocks, more clearly represented by
the Nasdaq Composite Index, appears to be on unstable ground. The
Nasdaq index itself isn't too far from its peak, but many
underlying growth stocks have plunged badly during this earnings
As an example, the S&P posted around 60 new 52-week highs
and 60 new lows last Friday, while the Nasdaq saw 21 new 52-week
highs against 139 new lows, a nearly 1-to-7 ratio.
Short sellers are on the case. The latest short seller data,
released on May 9 and reflecting short positions through the end
of April, show a great deal of macro positioning by short
sellers. Their use of exchange-traded funds (ETFs) as proxies for
bearish bets is a strong tell in this market. Here's a look at
some key funds, and how shorts are adjusting their exposure.
Broadly speaking, short sellers are boosting their exposure to
tech stocks and small caps, while reducing their exposure to
value stocks, bank stocks and utility stocks. Some of this is a
valuation call: Tech stocks and small caps had become arguably
overvalued, and a rotation into stable value plays often happens
in the latter stages of an extended bull market.
That doesn't mean that the bull market is about to end. But it
does likely signal that the frothy phases that we typically see
in the early years of a bull market have played out. That argues
for more muted gains ahead.
You'll also note a rising short position in a junk-bond ETF.
As an economy expands, credit standards start to loosen, and
lenders start to issue more dubious bonds.
Short sellers have also been boosting their positions in specific
companies that they believe to be ripe for a pullback. Their
higher short positions often are related to a news-driven
For example, at the end of April, they made
Bank of America (NYSE:
the third most heavily shorted stock on the New York Stock
) on news that BAC had botched a key filing with regulators.
BAC's application to start boosting dividends and buybacks was
plagued by a $4 billion error, leading investors to once again
ask whether this perpetually mismanaged bank was still worth
If you do want to own a major bank with operational
challenges, focus on
, which trades for 80% of tangible book value. Even after a
recent slide, BAC's shares trade right at tangible book
Mexican cement maker
, which saw its short position rise 12% in the final two weeks of
April to 90 million shares, is also in the news, but not
intentionally. Roughly a month ago, two rivals (Switzerland's
Holcim and France's LaFarge) announced plans to merge. If the
merger goes through, the combined entity will have $40 billion in
annual sales, dwarfing Cemex's $17 billion sales base.
Cemex had a bankruptcy scare back in 2011, when shares slid
below $3. The company has managed to modestly reduce its debt
load since then, helping shares to rise more than 300%. But the
proposed merger by rivals brings the debt concerns right back
into the spotlight.
Short sellers know that Cemex can ill afford a price war,
thanks to more than $14 billion in long-term debt that is
generating massive interest expenses. Holcim/LaFarge could use
its relatively stronger financial resources to price contracts
that would really put the squeeze on Cemex.
Short sellers are also tracking the aggressive accounting
policies at wireless service provider
, which saw its short interest level spike 15% in just two weeks,
to 74 million shares. Sprint's first-quarter operating metrics,
released at the end of April, appeared roughly in line with
forecasts, highlighted by earnings before interest, taxes,
depreciation, and amortization (EBITDA) of $1.8 billion.
Yet Sprint's numbers are skewed by the fact that the company's
"installment payment plan accounting allows for upfront revenue
recognition of handset sales," which overstates cash flow,
according to analysts at Merrill Lynch, who see shares falling
from a recent $8.80 to just $5.
Looking at Sprint's true EBITDA generation (which will become
evident when the near-term accounting shifts are reconciled in
future quarters), Merrill thinks that figure is closer to $5.5
billion for 2014, not the $6.8 billion that consensus forecasts
infer. And shares look pricey at 11 times that more realistic
Merrill sums up its "underperform" rating: "Prior to being
acquired, legacy Sprint traded at 5.7 times forward EBITDA and
now trades at a higher multiple. The net change in the
competitive climate has been negative in the intervening
Short sellers are also increasing their stake in video game
: The short position rose a stunning 34% in just two weeks, to 65
million shares, representing 10% of the float. I highlighted this
two months ago on our sister site
, noting that "shares (traded) for almost 20 times projected 2015
Well, that couldn't last: Shares have lost nearly half of
their value since then, thanks to a 36% year-over-year drop in
first-quarter sales. Consensus forecasts call for a solid upturn
in sales in coming quarters, but short sellers foresee more pain
Risks to Consider:
If the market shifts gear and moves sharply higher, then
these heavily shorted stocks could see a massive short
Action to Take -->
Short sellers are likely to step up their game if the growth end
of the market continues to struggle. Once-untouchable stocks are
now returning to earth, though many of them remain quite lushly
valued. That makes this a good time to keep monitoring the
actions of shorts, as they may be pointing to the next market
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