Big Bets on a Crash

Strung out markets can be a volatile ol’ beast, as we’ve seen this year.  Last week had all the hallmarks of a short covering squeeze with US shares up robustly despite an ordinary end.  That appeared to continue last night with the S&P500 up 1.4% v ‘most shorted’ up 2.4%.  Notwithstanding that, the chart below shows there are still a near record number (18 billion!) of shares shorted (bets on a price drop) on the New York Stock Exchange.

Now that of course can go one of two ways, with last week possibly showing the result of just a mini covering rally (and don’t forget our story on the amount of margin debt on these shares – nothing like a margin call to spur along some action).  Or, like last time we were at such heady heights (see graph above), a little thing called the GFC happened and this so-called ‘smart money’ made a squillion on the ensuing crash (whilst those poor unsuspecting ‘mums and dads’ on the long side of that trade lost squillions).

One thing that could cause the first option is a big new central bank stimulus injection of some sort.  The chart below shows we are at a point where this could be something these desperados could try again…

The chart above is courtesy of Bank of America Merrill Lynch’s latest Global Investment Strategy. These guys are not very optimistic at the moment and in reference to the chart above are saying that if we don’t see stimulus of real substance from central banks very soon, we could see US Shares fall through the resistance line established last 25 August and this 11 February.  It could be precipitous from there…

They are pointing to the G20 meeting this Saturday in Shanghai as the first potential opportunity.

For gold it could be interesting either way.  No stimulus, shares crash, and markets as they have nearly always done – run for gold.  If stimulus is enacted we may indeed see the next leg up for shares.  But what we are seeing and hearing more and more so far this year is a growing wariness and understanding in the market that this central bank intervention is not ‘right’.  Indeed it is merely adding to the root debt problem.  On that realisation you may well see gold take off together with shares, or indeed shares may not even respond beyond a few days like we saw with Japan’s NIRP announcement.