Short Selling

Bearish traders boosted their bets on falling share prices between mid-October and mid-November, driving the total number of "shorted" shares on the New York Stock Exchange to a record, the exchange said Monday. That could help explain the market's strong rally in recent weeks: As shares rise, some traders who had bet against higher prices may scramble to close out their positions, which can add to an upward pressure on prices. The NYSE said the number of shorted shares rose to nearly 8.

Short sellers pulled back on their bearish bets in major financial stocks late last month, new data show. Whether that had anything to do with the Securities and Exchange Commission's attempt to quash the most aggressive form of shorting in 19 big financial issues, we'll never know. It could just be a coincidence. And in the case of at least one of the 19 stocks -- mortgage titan Freddie Mac -- the shorts were confident enough to keep raising their bets. After six weeks of plummeting bank and brokerage share prices, the SEC on July 15 announced an unprecedented rule aimed at preventing "naked" shorting of 19 major financial stocks, including Freddie Mac, Fannie Mae, Citigroup Inc. and Merrill Lynch & Co. SEC Chairman Christopher Cox has said the agency has no problem with legitimate short sellers -- bearish traders who borrow stock and sell it, betting the price will drop.

Short sellers don't expect to be loved for bad-mouthing popular stocks, but they do demand a little respect--and a profit every once in a while when they're right about an issue being grossly overvalued. So far this year, the shorts finally are getting their due. After enduring huge losses in 1991 when bad and good stocks alike just kept rocketing, professional short sellers have racked up tidy gains since February as many stocks have plummeted.

Las Vegas oddsmakers wouldn't have placed very good numbers on this matchup in Newport Beach this week: With the Dow Jones average near record highs, three stock market bears go before 130-some pension fund managers to plead their case. It didn't go well at all. But if you put any credence in the idea that the majority view of the market is often dead wrong, the poor reception for the bears could be a flashing red light.

One reason for the recent run-up in Korn/Ferry International Inc. stock may be capitulation by short-sellers. The Los Angeles-based executive search firm saw the second-biggest percentage decrease in short interest from Nov. 15 to Dec. 15, according to the New York Stock Exchange. Short interest--which measures the total number of shares traders have borrowed and sold, usually in a bet that prices will decline--fell from about 310,000 at the start of that period to about 4,000.

Here's another reason why the stock market has had such a rough last month: "Short" sellers--traders who borrow stock and sell it, betting they can replace it later at lower prices--sharply boosted their bearish bets in the 30 days ended Dec. 15. The number of shares of New York Stock Exchange-listed companies sold short as of Dec. 15 reached a record 4.875 billion, the NYSE said Thursday. That marked a 6.2% jump from the level as of mid-November.

If you want to witness a raging battle between investors who believe in a stock and short sellers who don't, Internet retailer Amazon.com provides a great case study. Take a spin through the Amazon.com message board on the Yahoo Finance Web site (http://finance.yahoo.com). Message boards have become well known in recent years for the relentlessly bullish postings of individual investors touting the prospects of stocks that they own, and that they believe others should own as well.

Bearish traders who were closing out their bets over the last month may have helped provide support for the stock market in that period. Nasdaq said Tuesday that short interest -- the number of shares borrowed and sold, usually in a bet on lower prices -- declined nearly 6% from July 15 to Aug. 15, to 4.404 billion shares.

Bearish traders have been boosting their bets that Nasdaq-listed stocks are heading lower. The Nasdaq market said Tuesday that short interest -- the number of shares borrowed, sold and not yet replaced -- rose 5% between mid-May and mid-June to a record high. The total number of shorted Nasdaq shares was 4.604 billion as of June 13, compared with 4.386 billion on May 15. The previous record was 4.456 billion as of mid-April.