Hedge Funds Shorting S&P 500 at `Crowded Levels,'

Contrarian indicator?
Or do they know something we don't?

" Hedge funds are short-selling Standard & Poor's 500 Index futures by the most in three years, a Merrill Lynch & Co. analyst said, and recommended investors buy the securities before the funds have to settle their obligations. "

Merrill thinks the shorts are wrong and that the party shall continue.

" "Large speculators'' had the biggest short-interest position on the contracts in the week through July 3 since mid- 2004, Mary Ann Bartels, Merrill's chief market analyst, wrote in a report to clients today. The bets, which speculate that the index is going to fall, require about $45 billion to buy back the securities for reimbursement, she estimated.

Short positions have reached "crowded levels'' and "we view this as a contrary indicator and readings continue to be bullish for stocks,'' Bartels wrote in a weekly note on hedge- fund activity. "Short levels provide a floor on price.'' Merrill, the world's biggest brokerage, used data provided by the Commodity Futures Trading Commission's weekly Commitments of Traders report. "

The argument is rather simplistic. The record level of short positions can also be attributed to increased merger and LBO activity and the increasing use of complex trading strategies such as pairs and spread trading. This is a complex situation that requires a closer and more thorough look. I intend to write a lengthy report on the dramatic rise in NYSE and NASDAQ short positions later this week.

Source: Hedge Funds Shorting S&P 500 at `Crowded Levels,' Merrill Says (http://www.bloomberg.com/apps/news?pid=20601084&sid=aqA7JIw6ArvQ&refer=stocks)