May 26 New York

Pinestone Investments

DJIA fell by 2.67 points to 21080.28 while SP500 rose by 0.75 points to 2415.82.  Nasdaq Composit Index gained by 4.94 points to 6210.19.  10 year treasury yield remained 2.25% while WTI gained to $49.87 a barrel.  The rate of the yen to the dollar was 111.33.  The SP500 has climbed 7.9% since January, including its biggest gain since April last week.  At the same time, short interest as a proportion of total shares outstanding has also expanded, rising by 0.3% to 3.9%.  An equity advance as big as this year’s has never occurred with more short sales before.  It is not hard to see why bears are standing firm, when any mishap from President Donald Trump could cause serious confusions in the market where valuations sit at levels not seen since the dot-com era.  Just one week ago, stocks suffered their worst rout in eight months as concerns over Trump’s presidency surfaced.  Yet the loss was quickly erased and the SP500 rose seven straight days to reach record highs.  The SP500 rose 1.4% to 2415.82 over the five days, finishing the week with the best gain in a month.  The DJIA added 275.44 points, or 1.3%, to 21080.28.  The challenge for short sellers is how long they can stay solvent before being forced to buy back the shares that they have borrowed and sold.  And the pressure to cover is building.  The steady gains in the stock market has made life difficult for bearers.  Hedge funds that aim to profit from short bets have lost money almost every year since 2009.  This time, however, any kind of pessimism is nowhere to be found.  The confidence among short sellers seems to be consistent with the defensive stance prevailing the market.  Investors are pulling money out of stocks after the initial rush to buy faded along with optimism over Trump’s pro-growth policy.  They have withdrawn $20 billion from exchange-traded funds and mutual funds this quarter, reversing about one third of the inflows seen between November and March.  Bullish bets are also shrinking in the futures market.  Net long positions in SP500 contracts held by large speculators fell in seven of the last eight weeks and were closer to turning net short than any time since December.  The market appears relatively cautious by historical standards.  The bullish view is that some of these shorts will have to be covered at some point, lenthening the rally.

Kazuhide Matsuishi

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