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Brokers Recommend Traders Sell Short, Could Indicate Bearish Market

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Brokers are increasingly recommending short selling
Brokers are increasingly recommending short selling

Some stock brokers seem to be feeling pessimistic about the market.

This week, short sale recommendations among institutional brokers jumped to 44 percent, up from its average of 35 percent in the first half of the second quarter, according to data compiled by financial technology and consulting firm TIM Group. That means brokers are betting on rocky a market for the foreseeable future.

Short selling is a technique traders use to profit when assets, such as stocks, lose value.

Some brokers have recently been recommending short sales of prominent blue chip stocks like Nike, RIM and Chipotle, among others.

According to TIM Group, any figure above 33 percent is considered a bearish trend -- meaning those making the short sale recommendations have a pessimistic outlook on the market.

"It continues to be a bearish market," said Dianne McCoubrey, Client Director for North America at The TIM Group. McCoubrey attributed the pessimism to "volatility in the market" and said that "a lot of what is going on in Europe is impacting the economy around the world," prompting brokerage firms to recommend short sales. "This quarter, people thought that things would turn around," said McCoubrey. "They have not."

Others are more cautious about whether these figures are actually indicative of how the market will perform moving forward. Author and stock analyst Barry Ritholtz said a jump in short sales often precedes a stock market rally. He also said that salespeople at institutional brokerage firms "say whatever they need to in order to get a sale," meaning that their recommendations should be taken with a grain of salt.

Market volatility has been a wide topic of discussion lately, both among finance professionals and U.S. regulators. On Thursday, Securities and Exchange Commission chairwoman Mary Schapiro told Congress that some investors are unsure "whether the market structure itself is tilted against the individual investor and in favor of the institutional investor," and that they have a "concern about the integrity of the marketplace."

But it seems that overall, traders are following brokers recommendations to short stock. In the first half of June, short selling jumped on both the New York Stock Exchange and Nasdaq, according to the Wall Street Journal. On the NYSE, the number of short selling positions rose 3.31 percent, the Journal reported Tuesday. WSJ did note that 45 percent of the increase in short selling on that exchange was attributable to one stock -- Johnson & Johnson. On Nasdaq, shorts rose .59 percent

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