Unloved Bull Markets

Chapter 13Human Behavior

This chapter is going to offer a hypothesis that investors make decisions based on just one variable and that they overestimate the relationship between that variable and the stock market. First, however, let's have one more reminder just how unloved the bull market was.

Short Sellers

Behaviors of short sellers provide a nice summary of how “unloved” the bull market was and how many investors were wrong. To sell short, investors can borrow stock they do not own and sell the shares. If the stock price drops, the investor can buy back the shares (cover) and keep the difference between the selling price and the repurchase price. If the price goes higher, the short seller loses money.

Stock exchanges keep track of shares that have been sold short and not repurchased, called short interest. An index computes total short interest on the NYSE, NASDAQ, and AMEX and divides that total by the total float. Float are shares that are outstanding and eligible to be traded. The index reveals what percent of shares outstanding and tradeable have been sold short and not repurchased. It is shown in Figure 13.1 (black) along with the S&P 1500 Index (gray) from December 31, 2008, through November 15, 2019.

At the far left is heavy short selling relative to float in early 2009, before the bottom, at the bottom, and even the first few months of the rally. Apparently, these investors did not believe the rally was sustainable and “for real.” But looking back, it was, and ...