Too Many Bears?

Not in 16 years had Wall Street seen so many bears. They were counted officially last week in the New York Stock Exchange's monthly report on the "short interest"--i.e., the number of shares sold short against an anticipated decline. By mid-May, the short interest had risen 130,058 in a month to 1,628,551 shares, the biggest total since the bank panic of February 1933, when it reached a peak of 1,894,632 shares (but far below the record high of 5,589,700 in May 1931).

The market gave the bears some mild encouragement; the Dow-Jones industrial average closed last week at 173.49. off 1.71 points. Did the big rise in "shorts" mean that the market was likely to keep on going down? Paradoxically, many Wall Streeters thought it meant just the opposite. They argued that any rise would scare the bears into "covering" (i.e., buy in the stocks they sold short), thus give the market an added boost. On the other hand, if the market dropped further, the bears would also buy so they could take their profits, thus check the drop.

The bulls had history in their favor. In twelve out of the last 18 years, the short interest peak was reached just before the market started up. The bears had guessed right only ,six times. Their failure was even more impressive when the short interest was measured in relation to the total volume of trading. In this ratio there were two previous peaks--in 1938 and 1948--as high as last week's. The 1938 bearish peak came just before the market shot up 52 points; the 1948 peak came during a 30-point rise. This moved Wall Street's Francis I. du Pont & Co. to observe last week that the new bearish peak merely means that "Johnny Come Lately is on the bear side [and] it has not paid big dividends to follow him in the past."

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