Stock Market Short Interest Off The Charts...Fed On Deck....

By: Jack_Steiman

A new report came out this morning showing trader-short interest is at an all-time high. Nothing like fear to create a more bullish environment. The short interest here is at a greater level than at any time during the 2000-bear market or the 2009-bear market That's almost impossible to believe, but that's what the numbers are showing. Most folks know the rule of this crazy game with regards to following the herd. Never do it! If the masses get too bullish it's probably not a bad idea to start removing most of your long holdings. No different than when things get far too bearish. Right now the trading world is far too bearish, which tells me that over time it's more likely, though no guarantee, that we'll get through S&P 500 1993 before losing S&P 500 1867. Taking out 1993 would negate the bearish-bear flag pattern, and set things up more balanced between the two sides. Then it would be more about sentiment.

The best thing I can say is that I personally wouldn't be shorting very much if at all when I see this type of bearish sentiment taking hold of traders. We all know what froth on the bullish side looked like, but we have done a full, one-eighty here. The bearish sentiment is now off the charts, and, thus, it seems the best strategy would be to buy weakness, such as when the short-term sixty-minute charts unwind from overbought. This doesn't mean we can't go lower because we can, but it tells me selling should be contained more for the short term at least. With the bull-bear spread now at exactly zero, the bulls don't have to worry about froth for a very long time to come, while the shorts need to worry about too much fear, and, thus, too many short plays out there that will need to be covered if we start to take out 1993 on the S&P 500. While things still aren't very good economically for the bulls at least they can feel good about how things are working on the sentiment from. All time short interest is nothing to ignore.

Tomorrow we get the news from the Fed Yellen regarding her action on interest rates. The market is going to have a fairly strong reaction, except I honestly don't know what it'll be. I do believe the market wants to remove uncertainty meaning it would like to see a rate hike. The Fed could raise rates a quarter of a percent which is nothing and remove the fear of an aggressive cycle and I think the market would like that. It wants to see confidence. If she shows more fear I think the market may not like it initially. It may not like either story initially, but I think that the market would rally back based on the fear situation I just spoke of. That said, I do think it would be best to raise rates and get on with things. This zero-rate cycle has gone on way too long and is letting traders know that the economy is not in good shape.

Even if it's a small percentage, it would be good just to start moving those rates slowly higher. Again, remove uncertainty. Show a bit of confidence. The market should move about quite intensely for the last few hours. It will be exciting, but difficult to trade so patience would be best. If we can get some weakness that would help unwind overbought sixty-minute charts and offer up better buying opportunities. We all know the Fed doesn't really think things are good economically, both here and abroad, or she would have raised long ago, but there's always the new moment to show some faith. Maybe now she'll get going. Probably not it seems as most supposed experts believe she'll wait until at least December, but I think that would be a mistake. Nothing is more important to the market than showing a belief in the economy. While a quarter hike is far from that reality it's at least a start. Everything has to have a starting point and I think she needs to start right now. It will be interesting not in only what she does, but the wording behind the action. Stay tuned for a very interesting day tomorrow.

The market is more interesting now since we have fear and the Fed working things. 1993 on the S&P 500 is all we really care about on the up side, and 1867 on the down side. It doesn't matter how we get to either number. All that matters is we get there. Which one will it be? I think in time we break through 1993 simply because the fear is so incredibly intense. No guarantee on that, of course, as so many unknown outside events could kick in without warning. But aside from the unknown, it seems to me that the amount of fear we're currently seeing will win the day short-term for the bulls above 1993 before we lose 1867. Buying weakness seems to be the safest way to play, but nothing too aggressive, of course. The monthly charts still stink in a very big way. A day at a time as we learn a ton more tomorrow, after we get the rate news and wording to follow.

Peace,

Jack

Jack Steiman is author of SwingTradeOnline.com ( www.swingtradeonline.com ). Former columnist for TheStreet.com, Jack is renowned for calling major shifts in the market, including the market bottom in mid-2002 and the market top in October 2007.

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