What happened on the day of May 18 2009 in the Indian stock exchanges will be recorded in the pages of history as the most significant and unique day of trading. In fact very less people traded on that day. What must have caused that great event is only the short-squeezing of bears by the bulls. The great game of the stock market is nothing but the battle between bulls and bears.
Image SourceThe Bull-Bear Fights
You must have heard about bears inflicting pain on the bulls. Or the bloodbath in the markets. They refer to the fact that bears are causing injuries to bulls because bears got strong and bulls became weak. The bear bites the bull with is nails and from there comes out the blood. When too many bulls get injured at the same time, there will be blood flowing all over the street. That is when you will hears the phrases – “There was blood on the Wall Street”, “There was bloodbath today on Dalal Street”.
Similarly to this bulls also sometimes inflict pain on the bears. Generally bears do not come in the way of bulls as the stock market’s general strategy is going long. What bulls do to bears is that they squeeze the bears. This is more deadlier than the bloodbath for the bulls. These two kinds of effects are opposite and happen in different types of trends.
Getting Squeezed: The Short Sellers Bloodbath
It was amazing to see that for the first time in history stock indices themselves skyrocketed on a single day to gain by 20%. In history this kind of limit is reached only on the downsides. The Great Depression 1.0 of 1930s had many such great crash days. But never was there a day when markets shot up by 20% and trading got halted at the upper limit.
The circuit limits are introduced intentionally for the downtrend as that is what causes pain for the most market participants. The upper limit is generally thought to be only for the good. But the truth of the matter is not so. Such massive moves in a short period of time do not happen because the good will of the people. Only those who run away try to do so quickly. But this time it was the turn of the short sellers who had to close their positions quickly because the reality turned around their expectations.
The election results were not only surprise to the Congress Party which has won. But also to the many market participants who went short massively after a long pause of the present bear market. The stair case price behavior of stock charts and even indices indicates massive shorters on the line. And they simply got squeezed by the over-enthusiastic bulls beyond imagination as the weekend gap played its traditional role in the opposite direction.
This is what Investopedia says about Short Squeeze:
“What Does Short Squeeze Mean?
A situation in which a lack of supply and an excess demand for a traded stock forces the price upward.”
“If a stock starts to rise rapidly, the trend may continue to escalate because the short sellers will likely want out. For example, say a stock rises 15% in one day, those with short positions may be forced to liquidate and cover their position by purchasing the stock. If enough short sellers buy back the stock, the price is pushed even higher.”
If you get trapped in a short squeeze you will understand how it feels. You just can’t breathe. Even death cannot save you because the losses that come from short squeeze have no limits. And they can go beyond your initial capital you would have never thought about.
Generally short selling is considered to be the most risky kind of trading. But it is also the most profitable in a very short period of time if things go right. The perils of short trading lie with the bear squeezing. The stop losses too can’t help much. In the opposite trend, stop loss can help. But when stocks go up due to profit taking, loss booking by the short sellers or bulls squeezing bears, stocks can sky rocket in a matter of moments without notice.
But I felt happy about this though I didn’t gain anything from it due to lack of participation. A 20% gain that too on the indices which move slowly is the gain of a year. If you captured it on that day, then you can rest for the rest of the year!
It Spells Caution!
The most important thing to note from this event is that it goes to only show the powerful nature of the long term down trend we have. Even history has shown that such strong rallies happen only during longest and strongest bear markets. One example is the bear market rally of the 1933s on the Wall Street. The Dow Jones Industrial Average rose by 15.3% on March 15 1933. Nasdaq rising by 14.2% on January 3 2001. The recent one being Nekkei of Japan rising 14.1% on October 14 2008. October and September 2008 were the two months when the stock markets all over the world had their worst falls in history.
A White Monday in the History of Indian Stock Markets
Shall we call that day (May 18 2009) a “White Monday”? We should rightly call it so based on what SEBI says about the balance short selling creates during downturns.
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