ON SENTIMENT
In its most recent release, covering the week ending April 15th, the NYSE reported that specialists on that exchange accounted for only 15% of all short sales. Public short sales were 3.7 times greater than short sales from the specialists, an unheard-of number.
Specialists are the market makers for companies listed on the NYSE, meaning that they see most of the order flow that comes in, and are responsible for maintaining orderly trading in their stocks.
Because of that responsibility, they have access to tremendous information, something nobody else gets to see. It's not surprising, then, that when specialists as a whole take extreme positions one way or the other, the market tends to follow. If they are leaning one way, then that means the public is leaning the other way, and I would much rather side with the specialists.
The figures for the week ending April 15th were so unusual that we've never seen another time in history, going back to 1942, that exceeded the current one. The two readings that come closest were:
The week after 9/11: S&P 500 was +10% one month later
The week of 08/13/04: S&P 500 was +6% one month later
The week after the 9/11 attacks, the public shorted 3.3 times as many shares as the specialists; the week ended 08/13/04, they shorted 2.6 times as many. Both were pretty good times to be a buyer along with the specialists." SentimenTrader.com, May 1, 2005
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