Bearish Bets are Good for Stocks

Stocks wasted no time pushing to new highs late last week… thanks to the bears.

Yes, The S&P 500 closed at a new all-time high on Friday. Stocks are up more than 5% on the year now. But a lot of traders are sold on the market’s strength right now…

“[Short sellers] are loading up again, sending bearish wagers in the SPDR exchange-traded fund tracking the Standard & Poor’s 500 Index (VIX) to almost 11 percent of its shares, the highest proportion since 2012,” Bloomberg reports.

No worries. You can make these bearish bets work in your favor. It’s worked before—and it could work again this year.

How?

After bearish bets peaked in 2011 and 2012, Bloomberg notes that the S&P rallied more than 14% in six months.

S&P 500

“One of the best things you could do in the stock market over the last three years has been to buy shares from short sellers,” Bloomberg declares, “who borrow stock with the aim of replacing it once the price falls.”

But it isn’t just the bears who hate stocks. The average investor isn’t down with this rally, either.

“According to a new study published in the Financial Analysts Journal, investors (that’s both individual investors an institutional investors) currently have the lowest percentage of their portfolios invested in stocks since they began collecting data in 1959,” reports Jonas Elmerraji from our trading desk. “Just 37.7% of portfolios are stock positions at last count.”

“How many years of blockbuster returns can investors sit out on before they start acting impulsively and we get a return to a buying frenzy market?” Jonas asks. “My guess is not many more. Even though stocks are hitting new high notes this month, we’re far from being in an irrationally exuberant market.”

Regards,

Greg Guenthner
for The Daily Reckoning

P.S. Jonas sees this fact as yet another reason to believe there’s a lot more upside room for stocks to run in 2014. What for additional short-covering to potentially push stocks even higher in the coming weeks. Sign up for the Rude Awakening for FREE today to see how you can trade these trends for huge gains…