They Do Not Believe

Last month I discussed the Insider Confidence in the stock market by looking at the number of corporate insiders buying vs. selling.  To update, the ratio from the most recent week came in at 1,169 sales for every 1 purchase.  Insiders do not believe in the rally.

Last week we received word that it has now been 21 weeks in a row that retail investors (401k and IRA funds) have been net sellers of the stock market.  This is unprecedented and means that the average American has now been selling for three straight months.  They do not believe in the rally.

The New York Stock Exchange short interest this morning was at 14.35 billion shares.  30 days ago it clocked in at 14.36 billion shares.  Shorting a stock means you have sold it thinking its price will fall.  You then buy back the stock in the future and pocket the difference in price.

The short sellers (professionals) do not believe in this market rally and they have not budged an inch as the market rose in September.  They are still betting in a massive way that the market is ready to turn down.  They do not believe in the rally.

UBS reported this morning that their client only long funds reported a one week outflow of $783 million ending October 1st.  They reported a massive total outflow during the month of September.  The clients do not believe in the rally.

So if the public, insiders, and short sellers are selling stocks across the board, who is doing the buying to cause stocks to surge higher last month?

It is hedge funds (who buy with leverage), primary dealers (who buy with money they are receiving from the Fed's bond purchases), and high frequency traders. 

It is important to understand that when the market turns, these buyers will instantly become a cascade of sellers and they will have the ability to use leverage to the downside.

For a better understanding of high frequency traders, please take a look at the 60 minutes segment below.....