The just released short interest update from the NYSE tells us two things: as expected, the bulk of the rally from the early October lows was a function of short covering, as nearly 2 billion shares short were covered in the past month, a multi-year record, bringing short interest from equal to the March 2009 market lows at over 16 billion shares to just over 14 billion by the end of October, just as the S&P added almost 200 points. Indictively, it tells us that in this low liquidity and volume enrivonment, the covering (forced or otherwise) of each billion shares of stock on the NYSE is roughly equivalent to 100 S&P points. More importantly, now that the market has started its tumble, there are no weak hands left to cover and provide the natural bid buffer when the market goes bidless. Those who are short now, are short for good, and will likely cover far, far lower. Which leaves the only open question of what the EURUSD net shorts will do. However, with the EUR at one month lows, we are fiarly confident that any potential covering there is over, and only more shorts are being added.
And in other unpleasant news, the equity exodus continues unabated as equity mutual funds are running on "dry powder" fumes: in the week ended November 2, another $3.4 billion in cash was redeemed from domestic equity funds, bringing the total for 2011 to ($112) billion and the last two year total to $210 billion rotated out of stocks and into fixed income and/or precious metals. Excluding an irrelevant blip in August, this is the 29th consecutive weekly outflow from stock funds. Ironically, in continuing to do nothing to restore investor confidence, the SEC is doing the best job possible to actually fix this market - it is after all precipitating its terminal collapse and much needed reset.
Soon there will be nobody trading at all, and 1 ES block will move the S&P by 10% or more, confirming that during her tenure, Mary Schapiro singlehandedly destroyed what is left of the US equity market (but at least got a few cushy general counsel jobs for her employees at several HFT firms in Chicago and New York).