Have you ever been hugged by a bear ?

For anyone who has ever wondered what the term “a bear squeeze” was describing, events on Monday appeared to be a fine demonstration as equity markets in Europe rose 3% in one day. Many may have heard the term but may not have fully grasped the concept. First, the term bear is used to describe someone who has a negative outlook to an event or outcome.  Investment managers who believe a “bear market” is imminent sell assets with the expectation of buying back for less than they sold for. Some managers can “sell short”, this is a term used to describe selling an asset you don’t own, again buying it back at a future date for a lower price. Short sellers often get blamed for undermining confidence, depressing the share price in a company, creating a viscous circle to a self-fulfilling prophecy.

The reality is that companies that get sold short often have structural issues that short sellers do aggravate, but more than likely precipitate an event that was likely to occur anyway. Sometimes they are taking advantage of short term headwinds. Selling something you don’t own adds a layer of risk, as the buyer will want delivery of what he has bought at some stage.  Into the referendum, we discussed how negative sentiment had become, to a point where it appeared markets started to prepare for a leave vote, which is still possible. These managers may have started to position themselves for such an event, de-risking the portfolio is the industry term, others selling short.

If investment managers feel they have de-risked too far, and then start to worry they have left themselves exposed to an alternative outcome, and rather like fish who move in schools, all appear to change direction at the same time, for no apparent reason. Traders look to cover their short positions in a similar way. Those who have not sold, and have worn the pain on the way down are reluctant to sell, prices move higher quickly as panic takes over. Those who know there are short positions in the market exacerbate the situation by placing a squeeze on the short sellers. They can demand delivery which again forces prices higher. Bear markets are often punctuated with these squeezes.

Whatever the outcome most people in the UK will be glad this vote will be over and the result known so we can move on with life. Some people suggest if we decide to remain, the EU will look to exact a revenge to dissuade other countries from behaving in a similar way, that seems illogical. Whatever the outcome the EU will probably not be the same again. England is not the only country with many disaffected, according to the Telegraph Italians would also like their own referendum. Like any club whose members, become dissatisfied with the way a club is run, eventually either the executive changes or the members leave and join another club. 

Posted on June 22, 2016 .