Bad Dream Worsens for Short-Sellers
By Diane Hess
TheStreet.com Staff Reporter
01/22/2004 07:27 AM EST
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The last 15 months have been a nightmare for short-sellers, as the buoyant equity and bond market has left the sidewalks around Wall Street strewn with injured bears.
While positive price momentum is, by definition, bad for shorts, investors betting against stock prices say the current rally feels different: It's worse. Nevertheless, few are admitting defeat.
Short-sellers, who borrow stocks with the hope of buying them back later at a cheaper price, concede that the breadth of the latest resurgence has made it the roughest time in decades to go against the grain. "This is the most difficult rally for short-sellers since the bull market began in the early 1980s," said Chuck Zender, portfolio manager of the $10 million Grizzly Short Fund, which lost 31% in 2003.
On average, short mutual funds are down 32% over the past year, according to Morningstar. "In other rallies, there have been places to hide, places that weren't doing well," said Zender, referring to upswings in 1994, 1997 and 1998. "But this time around, that does not exist."
Meanwhile, some of the most speculative names -- the ones shorts like most -- have rallied the hardest. The five stocks on the New York Stock Exchange with the largest short positions last December -- Lucent (LU:NYSE - commentary - research), Nortel (NT:NYSE - commentary - research), Sprint PCS (PCS:NYSE - commentary - research), Ford (F:NYSE - commentary - research) and Calpine (CPN:NYSE - commentary - research) -- have risen 122% in the past 12 months, in aggregate.
Since a six-year low set in October 2002, the S&P 500 has surged 48% as investors have poured into a broad array of sectors, including technology, energy, basic materials and industrials.
"A hallmark of this rally has been a lack of selling," said Richard Dickson, a technical analyst at Lowry's Research, adding that his firm's selling-pressure index is at its lowest level in over two and a half years. "That makes it impossible for the shorts to make money."
