Extreme pessimism is becoming the norm on Wall Street.
According to Ned Davis Research, at the end of May around 10% of the total shares outstanding of all domestically traded ETFs were short 2-billion shares. This is the highest level of shares shorted since 2007.
While shorts are stacking up, Ned Davis' Neil Leeson and Johnson Research's Chris Johnson believe opportunities are created.
Neil Leeson, ETF Strategist at Ned Davis Research:
- Investment Play: Overweight the information technology sector and the semiconductor sub-industries.
- The Semi HOLDRS Trust = 214% of shares SHORT, high date 5/31/11. The semiconductor funds have over 100% of their shares lent out. This is due to the unique creation/ redemption process that exchange-traded products enjoy. Not only can authorized participants create shares for liquidity purposes, they can create shares to sell short as well.
Chris Johnson,CEO at Johnson Research Group:
- Short-interest is great counter-intuitive to what markets are doing. Best contrarian call is when everyone hates the stock, and the stock-interest goes up as a result of a deteriorating market. As its loses its glimmer, you use this as a contrarian indicator, which is why I’m bearish on semiconductor.
- INVESTMENT PLAY: Short interest mounting in Healthcare. Analyst recommendations are low in the sector as well. The sector is performing and nobody is paying attention. It’s a technically strong sector – good fundamentals, short-interest has been high on this. % of ETF trading above 50-day. Also favoring, Commercial Real Estate and Utilities.