Heard on the street: Even short-sellers believe plunge in stocks may not herald a sustained market decline
AuthorAffiliation Staff Reporter of The Wall Street Journal</br></br>"I don't buy that it's the beginning of some huge decline. The market is too high -- it's been too high for two years -- but it can stay too high for another two years," frets Michael Murphy, who publishes a short-sellers' newsletter called Overpriced Stock Service in Half Moon Bay, Calif.</br></br>There is a reason that the "shorts," who make money when stocks go down instead of up, aren't doing cartwheels over yesterday's move. They have bet heavily starting in early 1994 that the stock market was overheated and due for a major decline. But while the shorts have made profitable bets on certain individual situations -- there are plenty of overhyped stocks out there, after all -- the broader market hasn't plunged this year as they hoped.</br></br>Yesterday's drop in the Dow Jones industrials merely trimmed the year-to-date gain in the Dow to 13.2% from what had been 15.3% through the previous day. That is still a painfully bullish gain to the shorts. Estimates of the shorts' overall declines for the year range from 2% to 10%.</br></br>In fact, many of the active short-sellers are currently locked in to bearish bets that have gotten worse over the months. Shortselling levels on both the New York Stock Exchange and Nasdaq Stock Market are near records, a total of 2.76 billion shares. If the market shrugs off yesterday's drop and continues its rise, the shorts may have to close out the bets by buying stock at ever-higher levels, a phenomenon that at its worst is known as a "short squeeze." It is only then, say some market analysts, that the market will truly be poised for the sustained decline -- perhaps as much as 10% -- that nearly everyone expects.