Quote from trade-ya1:
I'll make a controversial statement here. While it is highly likely that we will see an orderly decline, we will not see a crash anymore due to the proliferation of hedge funds. Reason being is that the market has much more 2-way action due to hedge funds (longs and shorts) which will buffer the market on the way down with shorts looking to cover positions.
Just some food for thought. This guy covered quite a bit in a recent Barron's article.
Barron's - December 29, 2003 Interview
A U.K. hedge-fund chief sees two possible investing scenarios, and one's downright scary
By VITO J. RACANELLI
An Interview With Hugh Hendry
...
Q: How about some companies that you think will go down?
A: The remarkable thing, in my hedge fund, there's not many people more bearish than I am, and I have no shorts. Which fills me with some discomfort.
Q: How can a bear have no shorts?
A: I've got put options predominantly on the S&P going out to June next year. As I said, it's a bear-market rally. My pan is the stock market. We've pretty much completed the process, the conversion process of bears into bulls. The greatest fear I have is that if I don't have shorts, you better bet no one else really has many shorts out there. Lowry Research calibrates turning points in the stock market by fleshing out the raw emotion of the marketplace. They express a panic date when 90% of the volume traded that day was associated with stocks that declined on the day. And typically, at turning points near the 1962, 1974 and 1982 bottoms, you had 16 to 17 of such panic days. The really odd thing was that, while we had the 50% drawdown in the equity market from March 2000 to earlier this year, we had one panic day.
Why? We have a mature hedge fund community that is profit-incentivized to buy equities when the market is down 3%-4%, which you didn't have in previous times. Because of that, we still haven't seen the true bottom. This time around if markets slide, there's no constituency ready to buy stocks to cover shorts because hedge funds don't really have shorts now. That concerns me. That opens up the prospect of a more immediate decline in valuations. This market has not been subject to intense selling pressure. If it were to be, I fear you might get a crash-like consequence. That's why I have puts on the S&P 500. I'm long the U.S. Treasury market and long index-linked U.S. bonds. Given that everyone has been converted from bulls into bears in the bond market, you've taken a lot of risk out of it.
