EDITOR NOTE: It seems as if every day, there’s a warning about a near term market sell-off (though we haven’t really seen a significant slide since March). The latest of warnings comes from a Wells Fargo trader. Here’s his rationale: there’s hardly anyone shorting the market. So, with no “short interest” in play, there’s plenty of room for bears to run. Sounds reasonable enough. Adding to that, given plenty of other economic factors, there should be very little “reason” for bulls to run despite the “room” they’ve taken (and continue to take).
Chris Harvey, Wells Fargo Securities head of equity strategy, told CNBC on Friday that the low level of short interest in the market right now left "significant scope" for it to rise, which could coincide with a market sell-off.
Low levels of short interest are a positive sign in the near term, Harvey said. They demonstrate that people are much more constructive and that bearishness has been "rinsed or washed out of the marketplace."
However, low short interest also means that there's much room for the levels to go up. "Typically some of the worst sell-offs we've seen is when short interest rises from very low levels, which is where it is. It's not a catalyst by itself, but it's a concern, and it's a concern as we see the market melting up," the strategist said.
Short interest on the S&P 500 as a percentage of float was at 3.1% last week, CNBC reported, citing Wells Fargo Securities data. It's down from 3.3% in mid-July. Particularly low short interest was seen in utilities, healthcare, and financial sectors, CNBC reported.
Harvey also called US-China relations an "emerging risk," but not one of the bigger risks in the market place right now.
"What we worry about more is the narrative of negative interest risks coming back, the fact that we think political risk is underpriced, and back to school is going to have a ton of fits and starts which could play into the economy and the job picture," he said.
Originally posted on Business Insider