Salient to Investors:

Bespoke Investment and Bloomberg say short sales in the S&P Composite 1500 Index fell in February to the lowest in recorded data back to 2007 – the last time at this level saw the Index lose 3.3 percent over the next three months.

Bulls say the capitulation by bears shows the rally remains intact and more money will flow into stocks. Bears say it means a source of demand is diminishing in an aging bull market.

Price swings for US stocks are narrowing the most since the Great Depression. When the proportion of shorts dropped to near record low levels in March 2012 and 2011, the S&P 1500 lost 3.3 percent and 0.4 percent, respectively, during Q2.

Laszlo Birinyi says individuals will push stocks to a new all-time high in 2013 even as the rally ages and a lack of short covering fails to elevate prices because investor sentiment is not overly optimistic. Birinyi said the idea that the public is wrong at the turns and therefore a contrary indicator is untrue – the public is not the only source of funds and the individual has not necessarily made a wholesale commitment to stocks. Birinyi said bull markets since 1962 have a duration of four years – 4 of the 9 lasted longer than the mean and the market rose for six years during those periods. ICI report $16.3 billion went into stock funds the first three weeks of February, $2.5 billion to US equities.

Goldman Sachs reports its gauge of the most-shorted US companies is up 9 percent in 2013. The proportion of shares short in the S&P 1500 index has been declining since mid–2012. Markit said there are 14 longs for each short in US equities, near the highest level in at least five years. Sarat Sethi at Douglas C. Lane & Associates said stocks are reflecting optimism in the economy, so there are fewer opportunities to short. Uri Landesman at Platinum Partners said current short interest levels indicate people are very, very bullish – a bearish sign.Jason Brady at Thornburg Investment Mgmt said earnings may not be expanding fast enough to justify additional mutual-fund deposits, and is not sure fundamentals support the move.

Jeff Sica at SICA Wealth Mgmt said short interest is necessary for a healthy market and as short interest has continued to decline, it signals a market top.

S&P 500 earnings are predicted to decline 1.7 percent in Q1 2013, the first drop since 2009, while the median economist expects GDP to expand 1.8 percent in Q1. The S&P 500 is at 15.1 times earnings, the highest since May 2011 and versus an average of 16.4 since 1954.

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