Shorts Overplayed Their Hands

 | Mar 17, 2014 | 3:59 PM EDT  | Comments
  • Comment
  • Print Print
  • Print
Stock quotes in this article:

amzn

,

crm

,

plug

,

fcel

,

gild

The short-sellers and doom-and-gloomers overplayed their hands. That's why the market is roaring today, and it's why there's no real stock for sale unless you got a downgrade in the a.m.

To understand this kind of rally, let's go behind the scenes to see what it is like at a huge hedge fund, one that often takes such huge swings that its moves can impact the market, especially when there are so many like-minded funds.

First, the predilection of the average hedge fund these days is to the negative. With the market having done nothing this year so far, and with the biggest move being a 6% swoon, the hedge funds that like to bet against the market have felt emboldened. You haven't been hurt all that badly when the market rallies, and the declines have been pretty staggering, particularly in the industrials. Plus, the big negatives have been stemming from overseas, not the U.S., where the fear factor is much higher (usually out of ignorance). It is a little silly that the proximate cause of the biggest decline this year was some sort of problem in Turkey. Or was it Argentina? I forget, but I can Google it.

Second, the weather has created such a negative backdrop that highly-visible companies are routinely missing estimates (e.g., most retailers, restaurants, apparel companies etc.).

Third, the biggest momentum names have grown cool. Nothing like Amazon (AMZN) missing the revenue number, nothing except Salesforce.com (CRM) breaking down on a terrific number. You can go after a lot of companies on the short side if those two stocks act squirrelly.

Fourth, hugely frothy stocks, such as Plug Power (PLUG) and FuelCell (FCEL) and some too-small-to-mention biotechs, took the place of the higher-quality techs as well as some of the biggest biotechs such as Gilead (GILD) that suddenly found themselves under assault. The professionals know that froth is a real bad sign. I have said over and over again that as long as froth is contained to one portion of the market then we are OK and that you can profit from the froth in the IPO market. I will have an analysis of which ones I think will be winners later on my show. But suffice it to say that the more senior of the hedge fund traders can't resist shorting stocks when they see things as bubbly as they are.

Fifth, China. Boy China's become a mess. We have never really known what goes on in China. We don't trust the Chinese. We don't trust their data. But we still make estimates of the reports they put out, the different industrial production-like numbers and the estimates are always too high. No matter what the Chinese do any more they can't hit the estimates, and yet (weirdly) the estimates remain high. Remember what has to happen to break that cycle of pain. The estimates have to come down to a level where they can be beaten, and the stock market has to stop caring about China. They will occur simultaneously, but were aren't there now, which is why the commodities and machinery companies have been free fire zones for all sorts of short sellers. They've become can't-miss plays.

It is within that environment that we got this crisis in Ukraine and Crimea. I think, given all the weakness and all the handwringing about the slowing of global growth it seemed like the one sure thing would be for the market to take a real hit after the Crimean election that we all knew would be won by the Russian faction.

The Crimean issue has all the accoutrements of something that could really blow up. There's Vladimir Putin seeking to take over Ukraine, or at least a portion of it, lest it join NATO and become a European flank, splitting the Russian navy from Russia. It also looks eerily like the run-up to WWII, when Hitler was always charging that other countries were treating ethnic Germans harshly and then provoking those countries to take action so that he could go on the offensive. You have to admit that Putin is certainly using Hitler's playbook in asserting that Ukrainian thugs are mistreating ethnic Russians, so it is time to take action.

And then along comes Secretary of State Kerry saying that if Crimea holds a referendum this weekend there will be severe repercussions and the Russians will have to pay for their transgressions against the free people of Ukraine. Since we knew there would be an election and we knew the results of the election before it occurred, then you had to believe that Kerry was going to come in with some very hard sanctions that could both make Putin retaliate again and cause the oligarchs to sell their western holdings lest they be confiscated.

All last week that fear-of-confiscation trade occurred, so you had to believe that it would be ratcheted up even higher when Kerry went ballistic on schedule today.

So, in that environment it was a terrific time to go short. You had the one-two punch of election that you knew would occur with a swift response by this country that should ratchet up worldwide tension and bring out sellers, not to mention cut estimates for all sorts of companies that do business in Russia.

The first inkling, however, that the shorts may have gotten too aggressive came from a quick reading of The New York Times on both Saturday and Sunday. The Malaysia Airlines disappearance took up almost every conceivable inch of the front page. That, alone, was a total shock. Where's Crimea, I said to myself. Where's the sabre rattling? Then we got word that Russia had taken some gas facility on the border and I figured this is precisely the kind of action that the Ukrainian army would respond to. The provocation that would really get things going. But Ukraine's army did nothing and the Times barely covered it.

The election results came in and people yawned, caring much more about who was first seed in the Eastern conference and whether Wichita State deserved first seed in the Midwest given that it only played two bona fide contenders the whole season. Bracketology replaced Kremlinology.

The last straw came this morning when the European markets opened up and it was pretty clear that the Europeans and the U.S. went with the Munich model, giving us peace and higher stock prices in our time and giving the shorts nothing to grasp. So no wonder the market went higher. They were left scrambling when it turns out that neither Germany nor the U.S. came in with anything truly prohibitive.

Now we know that we haven't heard the last of Putin. Given the benign sanctions, you have to believe the dictator feels emboldened to take down a corridor, perhaps through Ukraine that splits the country, or something pernicious like that.

But the bottom line is that in the absence of something more cataclysmic by the allies in the face of a decent U.S. economic backdrop, there's no need to be short -- at least for now. So we get a rally that simply sets us up for the next Putin-inspired fall, one that's probably around the corner, but, alas, if it isn't scheduled like the election, who cares?

Columnist Conversations

3 insiders sold a total of 518,620 Starbucks (SBUX) shares for proceeds of $43.449 MM. 4 insiders dumped 558,1...
Yum Brands saw both insider buying and selling reported last week. One insider bought 10,000 shares for about ...
The bearish star cluster on the Starbucks (SBUX) chart that I highlighted last week preceded price action this...
Ford is working on its third straight gain following two days of steep loses to start this week. At this...

BEST IDEAS

REAL MONEY'S BEST IDEAS

Columnist Tweets

BROKERAGE PARTNERS

Except as otherwise indicated, quotes are delayed. Quotes delayed at least 20 minutes for all exchanges. Market Data provided by Interactive Data. Company fundamental data provided by Morningstar. Earnings and ratings provided by Zacks. Mutual fund data provided by Valueline. ETF data provided by Lipper. Powered and implemented by Interactive Data Managed Solutions.


TheStreet Ratings updates stock ratings daily. However, if no rating change occurs, the data on this page does not update. The data does update after 90 days if no rating change occurs within that time period.

IDC calculates the Market Cap for the basic symbol to include common shares only. Year-to-date mutual fund returns are calculated on a monthly basis by Value Line and posted mid-month.