Exsqueeze Me?

The stock market just keeps walking higher and while it might be taking everyone with it, it certainly seems to be taking remaining shorts and bears out of it.

One of the main forces that has fueled the 18-month-long rally has been liquidity. First there’s the one with the capital “L” of more than a trillion dollars provided by the government in the form stimulus and bailout packages; then there’s the more plebeian kind created by the traditional investment community which comes in two forms -- the (possibly mythical) money that’s waiting on the sidelines or hiding in bond funds, and then all the shares sold short by bears, which represents embedded buyers.

It’s hard to gauge the amount of the former or when or at what velocity it will flow back into equities. As far as the latter, recent data suggests that a lot of embedded buying has been squeezed out of the market. It wasn’t too long ago that the list of hard-to-borrow stocks and even ETFs ran into the triple digits.

But bears can take solace; if you haven’t already been taken out and shot, now may be a good time to peek out of your cave and sniff out some shorting opportunities as the likelihood of a further squeeze has been greatly diminished.

The table above uses data from ShortSqueeze.com to show the current short interest ratio (shares short/float) and the percentage change from 30 days earlier. I looked at some of the most widely traded ETFs, some popular big capitalization stocks, and a few of the favorites among bears that usually carry a large short interest.

My belief is that much of the short selling in the ETFs had been a form of hedging by money managers against their generally long portfolios. The decline in short interest suggests those hedges have now been removed. The reasons might be a combination of complacency in a market that keeps working steadily higher and the need to chase performance by those that have been slow or cautious to fully embrace the bull market.

Whatever the case, if the market does start to drop -- and this is not a prediction -- it means there will a stampede to reduce risk by shedding shares and shorting index products to gain protection and downside exposure. And that could give the bears plenty of fresh juice.