Short selling started to decrease as stock gains accelerated at the end of August. Increased banking regulation and stricter collateral requirements also reduced bearish bets, said Michael Gordon, who oversees about $65 billion as chief investment officer of equities at BNP Paribas Investment Partners in London.
Goldman Sachs Group Inc. shut its Principal Strategies unit that made bets with the New York-based bank's own capital to meet U.S. regulations curbing risk-taking, the company said Oct. 19. New York-based Morgan Stanley said last month that it plans to break off its largest proprietary-trading group as an independent advisory firm by the end of 2012.
'Prop Trading'
"The fourth quarter effectively seemed to be the end of prop trading for the investment banks," said Gordon, who was previously Fidelity International Ltd.'s global head of institutional investment.
Individuals have added $17.6 billion to U.S. mutual funds this year, following $94.7 billion in withdrawals during the last eight months of 2010, according to the Washington-based Investment Company Institute. The inflows this year are the first since April, when the S&P 500 began a 16% decline through July.
The S&P 500 has fallen 0.7% on average in the 60 days after mutual fund inflows were at least January's level of $6.1 billion, based on 10 years of ICI data tracked by Bloomberg. The figures compare with a 0.9% advance in the two months following withdrawals of that much.
"Most short sellers are professional money managers and the trend right now is don't be short, so they're going to ride that trend," said Michael Gibbs, the Memphis, Tenn.-based chief equity strategist at Morgan Keegan Inc. "It's verifying what all the other sentiment indicators are saying, which is that retail investors are becoming more bullish. But these indicators only tell you that the seeds may have been sown for a pullback. They don't tell you when."