With Stocks Amidst New Round Of Selling Pressure, FOMC Meeting Next Week Could Decide If This Stops

With Stocks Amidst New Round Of Selling Pressure, FOMC Meeting Next Week Could Decide If This Stops, Pauses Or Continues

Bears are making a killing. Stocks have come under renewed selling pressure. The S&P 500 is very close to losing 20 percent on a closing basis. Amidst this, fresh from a 50-basis-point emergency cut of last week, the FOMC meets next week. A lot is riding on what comes out of that meeting.

Bears’ conviction is paying off.

At the end of February, both NYSE and Nasdaq short interest rose period-over-period – up 2.7 percent and 0.3 percent respectively, to 16.6 billion and 9.1 billion shares. This preceded short-covering that lasted several periods – NYSE in particular (Chart 1). 

Most recently, NYSE short interest peaked at 17.1 billion at the end of last August. This was the highest since March 2016. Similarly, the mid-January total of 9.3 billion on the Nasdaq was the highest since October 2015. Before mid-February, shorts were hurting massively as major US equity indices relentlessly pushed higher. The prevailing carnage in stocks has tilted the balance shorts’ way. 

If there is any consolation for longs in all this, it is this. Because short interest remains elevated, as shorts cover and lock in profit, this should help form a bottom – eventually.

Thus far, sellers continue to dominate action.

On a closing basis, the S&P 500 large-cap index (2741.38) collapsed 19.2 percent in less than a month. Intraday Wednesday, it was down 20.2 percent. Overnight futures are down big – in excess of four percent. Markets are not satisfied with what President Trump offered Wednesday evening. If the selling pressure continues as the cash opens and closes later today, the index will have dropped north of 20 percent. 

Conventionally, a drop of 20 percent is viewed as the beginning of a bear market. As the bear headline hits, it is possible it acts as a self-fulfilling prophecy.  In fact, this could very well be taking place in the overnight action.

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