The market ended the week with sentiment still firmly in bearish territory. Among the indicators I follow, put/call ratios remain elevated, bullishness among investment advisors is low, and selling/short selling activity is hitting extreme levels. But it is this last indicator on which I'd like to expound.
One of the indicators I follow is the Specialist Short Ratio
. This is the ratio of short selling on the part of NYSE specialists as a percent of overall short sales. One of the roles of the NYSE specialist is to make an orderly, two-way market in stocks. So when a flurry of sellers comes in, the specialist has to be the buyer of last resort, so to speak. As such, during periods of extreme selling this ratio drops to low levels. Alternatively, when a buying panic ensues, the specialist assumes the role of short-seller and this ratio rises.
Right now the specialist short ratio is at levels as low (0.15) as I can remember. That means that there is a dearth of buyers out there, and the specialist is having to step up and fill this role. With the market down 3 of the last 4 months, it's likely that short sellers are sitting on nice profits for the year. I doubt they want to risk seeing those profits evaporate on a turnaround in the market. As such, I would expect short covering to add additional fuel to the fire on any subsequent rallies.
I am watching the 1165 level on the S&P 500 (SPX), which is the high from last week (4/26), to spark the first round of short covering. Conversely, if the recent low at SPX 1137 is taken out, it could further embolden the bears. But let's hope the market likes what the Fed has to say next week and the bulls can gain some momentum.