MARKETS SPECTATOR: Bears bitten

After Tuesday's rate cut, short-sellers have been scrambling to cover their positions in CSR and JB Hi-fi. Sentiment is swinging away from the bears.

It looks like some major investors got caught with their pants down last week.

The surprise interest rate cut on Tuesday meant that traders who had a large negative bet on building material supplier CSR Ltd, all of a sudden had to cover their short positions.

Despite the fact that construction continues to ebb downward, the rate cut put a boost under interest rate sensitive stocks, like CSR. And all expectations are that rates will be cut again in the next few months. To cover their positions, the short-sellers had to buy into a rising market, creating a sling-shot effect, driving CSR up 8 per cent.

Another stock that mirrored the change in economic sentiment is JB Hi-Fi. They saw an even bigger short covering rally and popped 10 per cent on the week.

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Source – Bourse data

There are still quite a few bears on the JB Hi-Fi register. If they are forced to cover in the face of more positive news for the stock, there may be second bounce.

From a birds eye view, the big miners -- BHP Billiton, Rio Tinto and Fortescue Metals Group -- led the reverse in short positions and hence, were the main driver behind the overall decline in short interest. It’s particularly interesting and promising for Fortescue Metals Group shareholders that fewer people are betting against the pure play iron ore miner following last month’s move to secure its balance sheet amidst volatile iron ore prices.

With rates expected to go lower, CSR surged more than 8 per cent for the week as those positioned short ran for the exit door as sentiment towards the housing sector improved dramatically.

Still on the same theme and there was an even bigger short covering rally in JB Hi-Fi. The stock surged more than 10 per cent as traders aggressively bought back their short positions in the stock. We note that there are still a significant amount of short positions in JB Hi-Fi, which could continue to see the stock head higher if the theme continues.

On the downside, there continues to be significant short selling activity in Fairfax Media as participants continue to bet against the once media giant.

From a sentiment point of view, the fact that fewer investors are betting against the stocks that are tied to a growing economy, suggests that we could be seeing some of the bears losing their bite.

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