Bears Are Still Growling On Wall Street

By Eric Fox | September 01, 2009 AAA

Although the conventional wisdom is that economic recovery is at hand, there are still many bears growling on Wall Street. A recent short interest report shows that most of the bears are concentrated in just a few stocks in the S&P 500. In fact, a mere five stocks account for about 16.6% of all short interest outstanding in stocks in the S&P 500 index. These five are in wide variety of sectors and are not concentrated in financials as might be assumed. (For background reading, see Short Interest: What It Tells Us.)

IN PICTURES:
Digging Out Of Debt In 8 Steps
GE and E-Trade and Citigroup, Oh My!
The bear story on Citigroup (NYSE:C) is pretty well known. The nation's largest bank had to be bailed out by the government, and even after that, critics called it a "zombie" bank, claiming that if its were properly marked to market, the company would be insolvent. This large short interest position must have been devastating the last two weeks as the stock has nearly doubled in the last month and a half. Nearly 7% of all short interest in the S&P 500 is in this stock.

E-Trade Financial (Nasdaq:ETFC) is second on the list and is 3.5% of all short interest. This company got caught holding a large portfolio of mortgage-backed securities (MBS) at the start of the financial crisis. E-Trade is in the middle of a debt-to-equity conversion involving two of its bond issues, and that has made the stock volatile of late. Some speculate that many investors who are converting are doing so to cover short positions in the stock.

General Electric (NYSE:GE) is another popular short target, perhaps because of its large financial business. The stock has rallied hard off the March 2009 low, and short sellers may be reloading to take advantage of anticipated profit taking. General Electric represents 1.7% of all short interest.

Merck (NYSE:MRK) and Pfizer (NYSE:PFE) also have large short positions, and these are a little harder to understand. Both have moved higher with the market and may be due for profit-taking, but they are reasonably valued, with Merck at 9.45 times forward earnings and Pfizer at only 8 times forward earnings. Both companies are also on track to show earnings growth in 2010, if the estimates are correct. Merck and Pfizer represent 1.7% and 2.8% of short interest.

Conclusion
Stocks with large short positions can be dangerous, as they are susceptible to what is called a short squeeze, a situation where the price suddenly escalates higher, and many investors with short positions move to cover, causing a further move higher for the stock.

Not every investor is optimistic about the economy and the direction of the stock market, and this attitude shows in an examination of the latest data on short interest, with a stunning concentration in only a few stocks. It seems a herd attitude exists not just on the long side of the market. (For additional reading, check out Finding Short Candidates With Technical Analysis)

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