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Frustrating Quarter Again For Short-Sellers as ‘Nothing’ Goes Down

Short sellers, who make their money betting against stocks, commodities and whole markets, came into 2010 with an optimistic outlook. The broad-based bull market was getting tired as it approached the one-year anniversary. The Federal Reserve was starting to signal the end to its unprecedented monetary stimulus. And credit problems were beginning to brew in Europe. But they’ll just have to wait for another quarter.

A broad based rally has continued in the first quarter of 2010 with just 45 members of the S&P 500 down more than 5 percent, a minimum decline that would even make it worth the short-seller’s cost of transaction.

Chipmaker Qualcomm, previously one of the 10 worst performers in the index year-to-date, exploded higher today after raising its forecast for the year. Lululemon , the yoga-wear retailer that was one of the more successful shorts of 2008, surged more than 11 percent today after also boosting its outlook.

“This is the first quarter I can recall in years that nothing on the short side is working thematically,” said Gary Kaminksy, who used to manage $13 Billion for Neuberger Berman and is now a regular ‘Fast Money’ contributor. “Lululemon is one of the most overvalued stocks I’ve seen.”

Lululemon plummeted in 2008 following a New York Times report that raised questions about the actual materials being used to make the retailer’s clothing versus what was displayed on the labels. Since that downfall, the shares have jumped more than five-fold. The stock currently trades at a forward price-earnings ratio of 40.

Short sellers borrow shares from an investment bank, sell them, and then wait until they can buy them back at a (hopefully) lower price. If the stocks don’t go lower, they eventually are forced to buy back the shares at higher prices in order to cut their losses. This phenomenon, known as a ‘short squeeze’, is helping to propel the whole bull market forward this year, analysts and investors said.

And it's not just stocks. Joe Terranova, chief market strategist at Virtus Investment Partners in New York, has attempted to short crude oil this year, most recently on Wednesday, and has been squeezed out. "Your trader instincts kick in and you realize that you're on the wrong side," said Terranova. "The inability to go short consumer stocks and economically-sensitive commodities like oil tells me that the jobs report next week will likely support the notion that we're in a V-shaped recovery."

Another story that had the vultures circling at the start of the year was Citigroup . Many thought the bank was a can’t lose trade on the short-side as the government began dumping its monster 27 percent stake on the market this year. What they didn’t count on was Uncle Sam being content to sit on the shares for a while as consumer credit quality made a faster-than-expected recovery.

According to Bloomberg News, a preset selling plan for the government is not set to begin until next month, around the time when Citigroup will present first quarter earnings. The shares are up more than 5 percent on the news.

With the possibility of an upside surprise in earnings, “you don’t want to be short this stock another three to four weeks,” said Kaminksy.

Many things on Wall Street have changed in the past year, put this maxim still remains: “The market can stay irrational longer than you can stay solvent.”

For the best market insight, catch 'Fast Money' each night at 5pm ET on CNBC. To play Fast Money’s bracket challenge, go to fastmadness.cnbc.com.

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Trader disclosure: On March 25th, 2010, the following stocks and commodities mentioned or intended to be mentioned on CNBC’s Fast Money were owned by the Fast Money traders; Adami Owns (AGU), (C), (GS), (INTC), (MSFT), (NUE), (BTU), (C); Kaminsky Owns (LULU) Puts; Terranova Is Short (GS), (CAL), (UAUA); Terranova Owns (QCOM); Terranova Owns (GLD) April Puts; Terranova Is Short May Crude Oil Futures; Seymour Owns (AAPL), (BAC), (MGM); Gordon Is Short Australian Dollar vs. Yen and U.S. Dollar; Tomasulo Owns (AMZN), (GS), (MSFT), (QCOM), (FCX), (XOM), (CAT), (MCD), (IBM); Tomasulo Is Long Gold Futures; Edwards Owns (UUP)

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