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Commentary > Bid and Ask
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This is going to hurt
The bull and bear camps have rarely been so polarized. One of them is going to get pounded.
September 26, 2003: 8:35 AM EDT
By Justin Lahart, CNN/Money Senior Writer

NEW YORK (CNN/Money) - Somebody has the market dreadfully wrong. When they realize it, there will be hell to pay.

There are always camps of bullish and bearish investors pushing their beliefs on which way stocks are headed, but rarely have things been so polarized as they are now.

Both the Nasdaq Stock Market and the New York Stock Exchange released short-interest figures earlier this week. On the Nasdaq, the number of shares sold short through Sept. 15 rose by 2 percent from the period ended Aug. 15. This despite an 8 percent rise in the Nasdaq Composite -- the sort of rally that usually sends short seller racing for cover.

On the NYSE, short interest fell by 1.5 percent. But it is still historically high, coming in at around 1.57 percent of total market capitalization according to Rhodes Analytics.

Bullish commentators regularly suggest that this heavy short interest is a powder keg, and that it means the market is set up for a huge rally to the upside.

To bet against a stock by going short, an investor borrows the shares from his broker and sells them, hoping to buy them back later at a lower price and return them. The difference between the price he gets to keep.

But when the shortseller gets it wrong, and the price of the stock goes up, he has to buy back the stock at a higher price. When things get out of hand, he's going to buy in a hurry, which only makes the stock go higher still. Such short squeezes can be powerful.

If there is an opposite to selling short, it is buying on margin -- borrowing money from the broker in order to buy more shares than you can with your cash at hand. And margin debt, too, is rising. At NYSE-member firms in August it rose to $149.66 billion, up 0.8 percent from July and 11.3 percent from the beginning of the year.

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Through July, the NASD has reported that Nasdaq margin debt grew to $26 billion, up from $5.1 billion at the start of the year. This prompted to Nasdaq to issue a warning on the dangers of buying on margin. Put simply, if you borrow money to buy stocks, and your stocks go down sharply, your broker, worried about keeping its principal, may issue a margin call: If you can't come up with additional cash, it will liquidate your stocks. It can send stocks down as sharply as short squeezes can send them up.

Both shorting and buying on margin are dangerous business. Investors who practice either really need to know what they're doing. Alas, often they do not. Somebody really is sitting on a powder keg. We just don't know who it is yet.  Top of page




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Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer. Morningstar: © 2018 Morningstar, Inc. All Rights Reserved. Factset: FactSet Research Systems Inc. 2018. All rights reserved. Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor's Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2018 and/or its affiliates.